[2678] How have those CPI-components behaved?

The CPI for March was released yesterday.

Malaysia’s consumer price index grew by approximately 1.6% from a year ago. It is slightly higher than the inflation rate recorded in February, which was at about 1.5% from a year ago.

You can see which components contributed to the higher inflation, as well as the price behavior of all the CPI-components from November 2012 to March 2013 below.

CPI components Malaysia 2013

From the chart, you can guess which categories suffer from price controls and which ones do not: the ones with constant change are those which prices are controlled. The obvious one is the alcohol & tobacco category.

Here is the alcohol & tobacco category:

Alcohol CPI Malaysia

Alcohol and tobacco are subjected to punishing sin tax almost every year. The step-wise inflation rate reflects the controlled nature of the industry. It is so bad that the industry considers that if the government does not mention them during budget time, it is good news.  This happened in 2012 when the government did not increase the sin tax and hence, the prolonged zero inflation rate throughout 2012.

Nothing, really, shows the controlled nature of the category more than month-on-month rate:


Each spike in the chart above corresponds to the increase of sin tax.

The transport also appears to be controlled. After all, fuel prices are largely controlled and it is reasonable to expect inflation in this category to be stable. It does seem so on this particular scale:


But it is just a case of bad scaling. After removing the 2008 outlier caused by government’s move to liberalize part of the subsidy regime, you can see the variation clearer:


Part of the reason for the volatility in the transport category is that while fuel and public transport fee, which is part of the category, is controlled, the category also includes vehicle prices, which are not controlled. Controlled and uncontrolled items are mixed together under one roof.

Moving on, I have always wondered the reason why have clothing and footwear prices been coming down. And it is not a recent phenomenon. It has been going on for years.

CPI-inflation Clothing Malaysia

The same has been going on with communication category but for communication, fierce domestic competition is pretty much the answer. You can see the competition everywhere. For clothing, it is harder to see so.

I would guess it is the magic of globalization since clothing and footwear are tradable goods, especially with China is to the north. But that sounds too simple.


[2643] Price ceiling on foreigners’ purchase will be ineffective at controlling home prices

In the news recently, the state of Johor plans to raise the floor price at which foreigners are allowed to purchase a house. The floor is now set at half a million ringgit. The proposed new floor is RM1 million (The news report in The Star wrote ceiling but if you know your microeconomics, you will know that raising the ceiling instead of the floor does not make sense and in fact, will bring in a very different outcome inconsistent with the overall theme of the article).[1]

The state government wants to control home prices and by raising the floor, the idea is that there will be more homes for locals while foreigners are only allowed the more luxurious home to purchase. More specifically, it is to curb price increase through demand control.

I am unconvinced how this will help, especially if the policy is unaccompanied with supply-related policy. The government does grant home permits but I think that is pretty much given out without much restrictions (Not that I am advocating controls. I am just describing the situation).

The ceiling alone may apply in the short run and only for pre-existing homes. In a slightly longer time frame when new supply of homes are available in the market, the ceiling will be rendered ineffective as market agents adapt to the new rules and regulations. This could be in the time frame of several years and maybe, even less than two. It does not take that long to build homes.

Suppliers of home will adapt to rules and regulations so that their endeavor is a profitable one. It is quite possible that at the current floor, home suppliers are already taking domestic and foreign demand into account.

If you take foreign demand out, these suppliers of home may decide to reduce supply in the appropriate home segment and increase supply in others accordingly so that prices stabilize in the longer time frame.

As I have mentioned, in the short run, it may be effective because home suppliers may have trouble to adjust. It takes time to construct home.

Then again, if the new regulations give suppliers enough time to adapt, i.e. the suppliers are given a grace period, then there will be no short term effect. Suppliers will adapt in time and price trend remains as they are.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — NUSAJAYA: Johor is looking at raising the present RM500,000 ceiling to RM1mil for foreign house buyers to check the spiralling price of houses. Local Government, Housing, Arts, Culture and Heritage Committee chairman Datuk Ahmad Zahri Jamil said the state Economic Planning Unit (UPEN) was studying ways to tighten the rules on foreign ownership and a decision would be made this year. “If there is going to be an increase, then foreigners will only be able to purchase homes above RM1mil,” he told reporters here. [Nelson Benjamin Johor looking to raise foreign house ownership ceiling to RM1mil. The Star. January 10 2013]

Economics Politics & government

[2375] Reducing the political cost of liberalization

A price-control mechanism has its economic cost, on top of that associated with the current subsidy regime in place in Malaysia. There are also some political costs to the control. In tight times when commodities are becoming dearer, any government that dares to reset retail prices upwards invites public wrath.

There was talk of an early general election, but the rumor machines now suggest that the election will be held only later. The Barisan Nasional-led federal government needs room to maneuver before renewing its mandate.

The prime minister is under pressure to seek a mandate of his own. One has to remember that Najib Razak is running on the 2008 mandate secured by the highly unpopular Abdullah Ahmad Badawi. Not only that, the prime minister also needs Barisan Nasional to do better than it did in the last general election. He must get the two-thirds majority in Parliament to prove that his government is better than the one led by his predecessor.

That is one of the ways the political cost matters. The political cost can affect cold but rational economic calculations. This is especially relevant for those whose conviction is measured by their appetite for adventure, or lack of adventure rather. That makes it important to reduce the political cost of liberalization lest the liberalization agenda, however disappointingly incomplete it is in its current form, be left high and dry.

The local political cost that exists is unfortunate because global economic reality largely ignores local political reality. In many cases, the increase in retail prices is inevitable amid rising world prices of various commodities.

The factors fuelling the hike are real: growing population, growing affluence and therefore growing demand. That is the current long-term trend. Mere business cycles neither erase nor change long-term trends by much.

There are some institutional issues affecting local retail prices as well. Without hurting the trustworthiness of the government, these problems have to be solved.

Liberalize the market instead of granting monopoly power to specific firms. Make the market open instead of having deals made in the shadows. Stop signing contracts that are grossly lopsided at the expense of public money. All that can lessen the degree of the hikes in the long run.

Yet, local issues just like short-term fluctuations are unlikely to drown out long-term trends. Until new technology, new culture and new alternatives prevail over old ones — or if total world population drops — prices will generally go up to clear the markets.

Because of the dissonance between local political and global economic realities, the political cost should be reduced so that both run parallel to each other. The political cost is a disincentive to good economic policy.

Democracy coupled with entitlement culture is a recipe for irresponsible populism. This is especially true for the fuel subsidy regime where the subsidy fixes the price ceiling and in effect subsidizes everything between retail prices and world prices. Under this arrangement, the government risks hypothetically unlimited expenditure. The higher the world prices, the larger the subsidy bill.

So, how does one reduce the political cost?

The government can stop being the fall guy. To do so, the government needs to stop managing prices. Relax the control. Let prices float. Let the market take charge instead. Let those closest to the ground — the actual buyers and sellers — determine the prices.

Using the fuel subsidy as an example, the relaxation can exist together with fixed per unit subsidy regime rather than the current unfixed per unit subsidy. In this way, the subsidy burden shouldered by the government will remain constant given a consumption level. Any increase or decrease in retail prices will be due to market forces only.

This particular arrangement will reduce the political cost faced by a liberalizing government by making the link between prices and primary market participants clearer. Prices will no longer be linked to the government. With the government out of the way, then perhaps the government will receive less flak.

The question of subsidy reduction itself will not even surface because increase in world prices will not increase the subsidy bill given the level of consumption. Indeed, a typical model will suggest that an increase in world prices might actually decrease the total subsidy bill due to decreased consumption.

In the end with less flak, perhaps the liberalization agenda can go farther down the road without unnecessary undue erosion of political capital.

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 June 2 2011.


[2368] Subsidy is not the only thing

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.

Economics Fiction

[2226] Of the road to hell…

It begins with a good intention. Everybody deserves to consume fantastical juice. After all, everything is made out of it. It would be a grave injustice to limit its consumption only to those who can afford it.

Invested with executive power, a group of individuals with only the interest of the public at heart intends to make the fantastical juice available to everyone. They — the do-gooders —decide to introduce a policy to subsidize the production of the fantastical juice.

What follows is a production boom that lowers the prices of the fantastical juice to affordable levels. In fact, the fantastical juice sold here is the cheapest in the region.

On the breakfast, lunch, brunch, tea, dinner and supper menus, the fantastical juice is a star. Consumers are happy. The policy becomes popular. The do-gooders are popular.

All is fine and dandy until one little problem pops up: scarcity. They realize the subsidy policy demands a whole lot of resources. The policy is depriving resources from other programs. They begin to realize that good intention is expensive.

It is all the more expensive when the producers are guaranteed payment through the subsidy scheme. Producers of the fantastical juice just keep on producing even when there is no need for more fantastical juice. After all, who does not want free money?

The do-gooders complain, ”Oh those pesky producers. How dare they take advantage of this noble effort to make the fantastical juice available everywhere to everybody at affordable prices? Never trust them. They are only in it for themselves. They leave us no option. We must regulate them.”

And so, the do-gooders decide to have producers of the fantastical juice licensed. Quota is imposed on production.

The producers protest but not too hard. After all, the policymakers still pay them money. ”At least, we are still making profits.” Without the government and the subsidy program, they would have been left at the mercy of the market. ”We might make a loss if there was no subsidy!” They figure, better work with the government than be at the mercy of the greedy consumers.

That stops the cost of the policy from ballooning further. It solves one problem but it creates another: the fantastical juice mysteriously begins to disappear from shelves of grocery stores.

Consumers are infuriated. Consumers demand action.

The do-gooders panic. They need a scapegoat fast. No, they do not need a scapegoat. One cannot make scapegoats out of smugglers. It must be those greedy smugglers abusing a system designed to benefit all. ”We will double officers at the borders and we will triple the penalty.”

They catch those smugglers but fantastical juice still disappears into thin air. At some point, they realize that they cannot continue to blame the smugglers. If they still do so even after greater enforcement, they would send out a message of failure that there is something wrong with the good policy, and that it is not the smugglers after all. That would undo all good work they have done. Support for their policy would plummet with the slightest hint of admittance of failure.

”We need to identify the problem,” demand the do-gooders.

They conduct a thorough study of the supply chain of the fantastical juice and they find it. It is the retailers. ”These retailers are hoarding the fantastical juice and profiteering from our noble effort. They leave us with no choice. We must regulate them.”

And so, the do-gooders decide that only retailers with the special license can sell the fantastical juice. The do-gooders also introduce price control and ensure that there is a fat margin for retailers. This will encourage the retailers to be more honest because if they are caught, they will lose their license and, because of high demand for the fantastical juice, they will lose a guaranteed profit. The elimination of price variation eliminates the opportunity for retailers to indulge in profiteering as well.

The retailers register a protest, claiming that it is not their fault. ”Supply, being inflexible, is unable to match demand. We do not hoard it. We cannot sell what does not exist.”

”Oh, if that is the case, then you are not managing your inventory efficiently enough for the good of the people. There is enough production for the whole country. We will manage the supply for you.”

Just to keep it airtight, only government-owned transporters are allowed to deliver the fantastical juice in the country.

The do-gooders marvel at their new master plan for the fantastical juice. Their proudest achievement is this: the cheapest fantastical juice in the region is still here.

Alas, shortage persists. ”Someone must still be profiteering from this noble effort,” cry the do-gooders.

Being at their wit’s ends, the do-gooders approach several consultants. These consultants point out that the consumers are consuming too much of fantastical juice. ”That is why there is shortage. They are over demanding it.”

The do-gooders are angry. ”Those no good consumers! They are abusing the system! We want to help everybody, but everybody is abusing our trust! We must regulate them!”

And so, consumption quota is imposed on every consumer. With control at every point, the do-gooders match demand and supply to solve the problem of shortage.

At least, theoretically because those with low demand get too much quota and those with high demand get too little quota. To solve the problem, consumers participate in the black market. Consequently, crime associated with the black market flourishes as cartels are formed to profit from the unlicensed and hence, illegal trade.

”Criminals! All of them are criminals!” shout the do-gooders, ”Send in the police.”

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 July 18 2010.