Subsidy reduction will allow market forces to allocate resources more efficiently. Prime Minister Najib Razak was reported saying so recently to justify his administration’s commitment to subsidy reduction in the long run. By doing so, the Najib administration claims to be an advocate of free market. A claim that is not necessarily true, however. At best, that claim reveals a selective belief in the free market.

The truth is that market forces are restricted not only through price mechanism. The restriction also comes in form of quantity control, among others. This is especially relevant in Malaysia where the government has introduced various regulations and institutions to control the price and supply of various items. Among those items are flour, diesel and sugar.

In fact, the government has wide discretionary power over this matter. Proof: the new Price Control and Anti-Profiteering Act grants the government the power to fix the price of any goods and services in the country. Yes, that is any goods and services. The net has been cast widely.

Despite the various channels where market forces are prevented from distributing resources efficiently, for some reason the price mechanism is receiving all the attention while the quantity side remains relatively untouched. As an example, look no further than the domestic sugar industry.

The government recently reduced sugar subsidy and effectively raised the retail price of sugar. All the liberal benefits of reduction have been thrown out in the open: fiscal deficit reduction, efficient resource allocation, investment over consumption, etc. You just need to name it.

At the same time and less discussed is the existence of the illiberal import quota system. The government through a quota system controls the importation of sugar. The government also grants the quotas only to several refineries ultimately owned by Felda and Tradewinds, which themselves are closely connected with each other.

It is not an understatement that the two companies control the sugar industry with a clear government sanction. As a side note, it will be interesting to see how the two companies will be subjected — if ever — to the new Competition Act, which has a highly questionable purpose.

If the government gets one point for liberalization due to subsidy reduction, then the government must lose a point from the import quota policy. Given how the import quota policy has created two related monopolistic companies — one being the favored entrepreneur of the government of the day and the other being a government-linked company — and that prices are controlled, the government must lose more than a point.

However one wants to keep the score, the inevitable conclusion is that this liberalization done through subsidy reduction is merely a half-hearted liberalization.

Whatever market forces are mentioned to justify the reduction in subsidy, it is stated insincerely. The liberal argument is just something convenient that the administration grabbed out of the air just because it fits its agenda of day. When one does not derive an argument from the first principle, one cannot expect anything less than inconsistency; the Gods of Inconsistency are staring straight into the eyes of the Najib administration.

The government can prove its credential as an honest advocate by deriving its policy from the first principle. That is, the whole industry must be liberalized. The removal of subsidy and price control must happen together with the loosening of the import quota system.

This goes not just for the sugar industry, but also for the relevant others.

It is only then that the prime minister can state that subsidy reduction will enable market forces to allocate resources more efficiently with a clear conscience.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on May 23 2011.

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