*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 already here, 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 based on theories and logics plus 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 which 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. Let’s put 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 toward 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 than 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 causes and systematic causes. 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 by that? 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.
Image 1: veasna168.weebly.com
Image 2: http://www.movetocambodia.com