Categories
Economics

[2362] Consumer subsidy, corporate subsidy and… tax incidence

There is an argument in the Malaysian political sphere that goes like this: reduce corporate subsidy first and only then reduce consumer subsidy if need be.

It is a fair point. Yet, the validity of the point depends on which corporate subsidy.

This is due the tax incidence concept. I will not thoroughly go into it but I will summarily state that it does not matter who is taxed or subsidized. Whether it is the producer or the consumer, the answer to the question whose welfare will decrease or increase depends on a person’s — producer and consumer alike — sensitivity to price change.

If subsidy to sugar producer is removed, it is very likely that welfare of a person will go down the same way how a consumer subsidy removal will reduce the same welfare (assuming it is welfare enhancing to the consumers in the first place). That is to say that the removal of subsidy for sugar producer has the same welfare effect as the removal of subsidy for sugar consumer.

To put it more concretely, say a subsidy enhances consumer welfare and both producer and consumer are subsidized at the same time. If you reduce consumer subsidy, the consumer’s welfare will decrease. If you reduce producer subsidy, the consumer’s welfare will decrease all the same.

Removal of subsidy from anybody does not shift the welfare effect from one side to the other. It merely increases or reduces the effect.

This is a point those arguing “corporate subsidy first” need to be mindful because they are the ones whom oppose increase in prices and the eventual reduction in consumer welfare.

Categories
Economics

[2361] 2011 sugar price compared to those in 1989 and 2009

I wrote two years ago that between 1989 and 2009, sugar price in Malaysia had increased on average less than 1% yearly within that period. To be slightly more precise, it rose on average by about 0.8% per year. In 1989, sugar was priced at RM1.20 per kg while in 2009, RM1.45 per kg.

With the current price hike, I want to update that post.

Today, sugar is priced at RM2.30 per kg. That means that between 1989 and 2009, the price has increased on average by approximately 3.0% per year.

What is the average yearly increase rate between 2009 and 2011?

Roughly 28.2%.

Categories
Economics Politics & government

[2360] Competition Act is a farce

Competition puts a downward pressure on prices. It is one of the forces behind innovation. It enhances welfare. Therefore, initiatives aimed at creating a competitive market are worth supporting.

For those who truly believe in a free and competitive market, however, the Malaysian Competition Act passed last year deserves neither admiration nor respect. It is worthless.

How can one respect the Act when the government itself is unimpressed with the spirit of the Act?

This question is especially pertinent after the Najib administration recently granted Bernas with another 10-year monopoly over rice imports in Malaysia.

The Act will be enforced in 2012. One would expect any government that is sincere or serious about encouraging competition to prepare the ground. What we are seeing instead is business as usual. Instead, the government continues to grant monopoly power to a specific company without any regards for the Act.

Government-sanctioned monopoly is not a phenomenon exclusive to the rice market. In the sugar market, the government awards import quota to a limited number of sugar producers. Here is something that makes it even more interesting. Tradewinds effectively monopolizes the sugar market, and it is related to Bernas.

In Sarawak, there is CMS Berhad, which has a disproportionate access to government procurements and tenders. It is the grand monopoly of Sarawak and it is a prime target for a proper anti-trust law.

One must not forget the various government-linked companies. They are so large and so powerful that their ability to distort the market is not doubtable. What makes it worse is that, one would rightly expect these companies to sleep in the same bed as the government, at the expense of consumer welfare.

The government after all has an interest to see that these companies are profitable because the government is the shareholder. For companies that it only has an indirect relationship with, bad performance is just bad politics.

In the name of competition, a respectable anti-trust law must subject everybody under the same rules.

Yet, ”activities, directly or indirectly in the exercise of government authority” are excluded from the Act. Companies that obtain their monopoly power through a government authority like Bernas easily fit the bill. It is also easy to argue that GLCs will enjoy the exemption as well.

Even if that stated exemption does not cover those companies, the Competition Commission as established by the Act has wide discretionary powers to exempt anybody from the Act. With a perverse incentive system that exists within the government, selective prosecution will likely be the norm. Private firms that attain large market share through sheer ingenuity will be prosecuted in the name of competition while GLCs and companies like Bernas continue to be shielded from market forces by the government.

In short, not only does the Act not encourage competition, it is a tool to make the market less perfect.  This Competition Act is no anti-trust law. It is a discrimination law.

The truth is that competitiveness of the Malaysian market can be enhanced without this Act, which shamelessly masquerades as an anti-trust law.

Government policy created these monopolies and because of that, it is arguable that a proper anti-trust law is like taking a sledgehammer to a nut. Instead of expanding the role of government, a reduction can be just as effective as a proper anti-trust law. Such a retreat will definitely be more effective than the farce that is the Competition Act.

This is how a retreat should look like: The government to divest away from most GLCs, to institute an open and competitive process to most of its procurements and to stop granting monopoly powers to the likes of Bernas. Do all that and with a little luck, even a real anti-trust law might be redundant.

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 4 2011.

Categories
Economics

[2359] Tricubes and apparent inefficiency in the market

The effect of the Prime Minister’s announcement regarding the 1Malaysia email on the stock price of Tricubes is interesting.

Tricubes’ stock price rose after the information about its 1Malaysia email project was first made public. That is fine. The efficient-market hypothesis says that all available information is summarized by its price. Here was a chance to turn a problematic company profitable and the market understood this. Some market participants responded by buying the stocks.

What is not fine is when the price jumped many times over after the Prime Minister announced the same thing more than a week later.

Since the two announcements relayed the same information, only the first announcement should have impacted the price, if the market was efficient. The second announcement was merely a repeat of what everybody in an efficient market should have known. The second announcement should not have effected the price in an efficient market.

Yet, price did go up.

Does that mean the Malaysian stock market is inefficient?

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

p/s — this was written late at night and my mind just was not working. This entry had a very different opening but I thought it was digressing too much that I thought it was easy to misunderstood what I wanted to touch about in the end, which was the efficient-market hypothesis. Just for the record, this was the opening:

Just as the Tricubes and the 1Malaysia email matter started to die down a bit, Idris Jala the man himself poured fuel into the fire to open PEMANDU up for yet another round of harsh criticism: why did PEMANDU, a public setup, defend what was supposedly a private initiative? Earlier communication mixed up ended up embarrassing the Prime Minister, whom shared with the public what PEMANDU knew was more complicated than what the Prime Minister thought he knew.

I am adding this just because I thought it shares what I thought of the whole issue. I wanted to share it but it is so insignificant (one paragraph) but adding it as a postscript would be sufficient.

Categories
Society

[2358] An individualist response to Ioannis Gatsiounis

I watched a documentary once. It was about Muslims in America. There was a young female Muslim in New York with typical American lifestyle. She was not the conservative type and I am on confident of that. She did wear a scarf though and that probably tells you that she identified herself with Islam.

In one segment, she said she did not feel the need to come out in the open to condemn terrorist acts done by some Muslims in the name of Islam. She said she was not responsible for it and she would not apologize for others. They happened to share the same religion as her.

I am in complete agreement with her. I am not because I am trying to defend the religion and Muslims at large. I have grown to be so much a skeptic in the past few years that I am more likely to criticize religion, any religion for that matter, than to defend it.

I am in complete agreement with her because there is a mark of individualism in that statement.

More importantly, the individualism is very much libertarian. We are responsible for our own actions and no one else. Each one of us is responsible for our own actions.

It is for this reason that I do not buy the narrative that moderate Muslims must come out to condemn terrorism or any wrongful act done by fellow Muslims. I disagree with what Ioannis Gatsiounis wrote at The Malaysian Insider today, where he wrote that the Muslim community needs to express “collective expressions of joy and relief of bin Laden’s death” to help combat the suspicion that Muslims are quietly sympathizing Osama Bin Laden and his merry men in Al-Qaeda.[1]

And then, guilt by association is a fallacy, after all.

No doubt, there are Muslims who sympathize with Bin Laden. That however does not negate the individualist argument. Those Muslims are responsible for their own positions. Other Muslims theirs, as with other individuals regardless of beliefs out there in this world.

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

[1] — Your initial reaction to news of Osama bin Laden’s death is telling. If you were disappointed, you no doubt harbour terrorist sympathies.

Of course, many non-Muslims have come to suspect many Muslims have been doing just that at least since 9/11. That impression may be inaccurate. But with repeated silence among moderate Muslims in the face of countless acts of terror committed in the name of Islam since 9/11, it’s easy to see why the suspicion arises [Hope for Islam’s image with bin Laden’s death. Ioannis Gatsiounis. The Malaysian Insider. May 3 2011]