Author: Hafiz Noor Shams

For more about me, please read this.

Categories
Economics

[1124] Of moderating the FTA-related drug prices increase

It is March and the deadline to forge a free trade agreement between Malaysia and the United States is looming closer. Here, I want to share a solution that could lay a middle ground between the supporters and the opponents of the FTA as far as drug prices are concerned.

Firstly, it is good to recognize why the prices of drugs could go up if the free trade agreement is signed. The increase is exclusively due to stronger intellectual copyrights law and not due to the principles of free trade. Though a majority of us, including me, does not know the exact detail of the FTA, there is enough information flying out in the public to be sure of that. With stronger copyrights law, cheap generic drugs would not be allowed to be sold as widely as it is available at the moment, in favor of patented drugs. Makers of patented drugs would be able to enjoy higher sales for longer period without the risk of competing with cheaper generic drugs.

While I generally support freer trade, I do sympathize for individuals that would be adversely affected by higher drug prices. Nevertheless, it is imperative for us to respect private property and directly, incentive for innovation. Between the two factors, a dilemma. The dilemma must be solved if the Malaysia-US FTA is to become acceptable to as many Malaysian as possible.

Here is what I propose to solve the dilemma: there is a role for the government. The Malaysian government could buy drugs from pharmaceutical companies and then resell it to the public through public health infrastructure at cost.

I know, I know. Anybody that is familiar with this blog would not expect me to propose a statist solution. Before you bang in the head however, please read on.

The program that I am thinking of might be distantly similar to what is practiced in Australia while stopping short at down right subsidy. The Malaysian government could buy drugs through auction and I am thinking reversed modified Dutch auction.

I am unsure if reversed Dutch auction is a common economic term for the kind of auction I have in mind but a Dutch auction works like this: there are a seller and many buyers. For simplicity and clarity reason, I shall call the seller as the auctioneer while the buyers as bidders. The auctioneer begins the auction by placing a high ask price. The price will be lowered by the auctioneer if there is no buyer. The auctioneer will continue to lower the price until there is a willing buyer. A variation of this auction was practiced during the initial public offering of Google back in 2004.

A reversed modified Dutch auction, as I call it, is a scenario which there are a buyer and many sellers. The buyer is the auctioneer while the sellers are the bidders. In a sense, reversed Dutch auction is the opposite of Dutch auction in the way monopoly is the opposite of monopsony.

Within Malaysian context, the Malaysian government is the auctioneer while various pharmaceutical companies of patented drugs are the bidders. The government starts by placing a low ask price in the free market. If there is no willing seller at such a low price, the government will increase its offer price and will continue to do so until there is a willing seller. The government could continue to do so until all of its demands are met. An example might help illustrate what I am trying to get at. Say the Malaysia government is demanding 1000 tons of drugs. At the same time, there are five sellers which I shall call A, B, C, D E and F.

Company A is able to supply 300 tons at RM1.00 per kg.

Company B is able to supply 300 tons at RM1.50 per kg.

Company C is able to supply 200 tons at RM2.00 per kg.

Company D is able to supply 100 tons at RM2.50 per kg.

Company E is able to supply 100 tons at RM3.00 per kg.

Company F is able to supply 100 tons at RM3.50 per kg.

The first 300 tons will be fulfilled by Company A and the government will pay RM1.00 per kg for drugs. This leaves 700 tons of unfulfilled demand. Realizing that nobody is willing to see any drug at RM1.00 anymore, the government raises it ask price and eventually will hit RM1.50 per kg. At that moment, Company B will step in and supply the government will 300 tons of drugs at such price. This leaves 400 tons of unfulfilled demand. The process will continue until the demand is exhausted. In this particular scenario, the government will pay at RM3.00 per kg at most; the government will not buy from Company F.

While prices could still increase vis-à-vis prices without the FTA, the increase would not be as much as that without this model with the FTA. If the drug prices are not low enough, perhaps the government could add in some sort of subsidy into the equation by selling the drugs bought at a loss. I however would only agree to such arrangement if other subsidies see some sort of quid pro quo reduction. Yes, I am looking at the Malaysian fuel subsidy. Essentially, the fuel subsidy reduction would finance the new drug subsidy, making this system neutral.

Whether or not we subsidize the drugs in the end, I do think this arrangement could solve the dilemma.

One major problem with this model is the possibility of the sellers colluding with each other to jack the price up. Nevertheless, such problem is not unique to or the exclusive weakness of this system. Therefore, I do not think it deserves to be addressed here. A discussion on collusion would take away the focus of this entry.

Another way to approach the problem is by having the government purchases the drugs in huge quantity, get bulk discount and resell the drugs at cost, possibly, exactly like the Australian model. Or, on top of that, with subsidy, with method explained earlier.

I am unsure which method would provide cheaper drugs but the latter certainly have less red tape to worry about.

Categories
Economics Personal

[1123] Of the fifth day and it is still going down

The Kuala Lumpur Composite Index is down for more than 4.5% today; this is the fifth consecutive day the index closes lower than the previous day. If it had gone another 1.5% down, the fall would have matched the day when the dragon sneezes. In fact, at around 1500 hours, it was scary.

It is especially hurtful when I see my stocks go down in prices like that. But I suppose, I should be optimistic and be prepared to buy as many stocks as possible soon, if indeed this fall is temporary. Where is the animal spirit when one needs it?

Oh Great One, possess us and bring us something less than irrational exuberance.

And oh Greenspan, please shut up.

Categories
Economics Politics & government

[1122] Of lefties’ unconvicing argument against FTA

Opponents to the possible Malaysia-US FTA come from various backgrounds and some they have expressed legitimate concerns against the FTA. When I met Ronnie Liu of DAP several months ago, he expressed transparency as a reason to object the FTA. I could accept transparency as as reason but yet, I am convinced that transparency is not the main reason behind DAP’s objection to FTA. This is because transparency was only mentioned after I demonstrated an inconsistency in DAP’s stance in a wider context.

There are many arguments against the FTA that are simply based on simple misunderstanding of economic concepts. I will not touch on that simply however. What I am interested in discussing is the inconsistent.

DAP opposes the Bumiputra policy, in particular the NEP, because it is discriminatory. I myself am against the Bumiputra policy due to how it prevents the market from working freely. But this is not about me.

Proponents of the policy cite that the Bumiputra and really, the Malays, need time to build up its capacity to compete against other economically superior ethnic groups. Hence, the protection and privileges given to the Malays. It is common for the other side, not necessarily DAP but the lefties in general, to come back and say such protection and privileges do not build up the competency the Bumiputa needs to compete against others; it only encourages complacency among the Bumiputra.

Despite not buying into the argument for Bumiputra policy as well as stating how the policy is not helping, many of the same lefties employ the same argument used by the proponent of Bumiputra policy to support protectionism and oppose the FTA. This group argues that Malaysia needs time to build up its capacity to compete against other economically superior countries. When proponents of the FTA cites that protectionism does not encourage Malaysia to become competitive but instead, sowing complacency, they shrug it off, seemingly implying that such inconsistency as a minor inconvenient.

In the case of Ronnie Liu, he ran away from the subject and cited transparency instead.

Lefties will need to sort that out if they are to convince others to oppose the Malaysia-US FTA. Else, lefties that oppose both the Bumiputra policy and the FTA are giving the supporters of Bumiputra policy a leeway. Perhaps, stripping the lefties that moral authority to talk about one issue or the other.

Categories
Activism Environment

[1121] Of Raptor Watch 2007

Today has been rather productive for me. I was at the Malaysian Nature Society headquarters earlier to help out with the preparation for Raptor Watch 2007. If you have not known yet, Raptor Watch is one of the largest birdwatching events in Malaysia. According to BirdLife International (formerly International Council for Bird Preservation), it is the only large scale nature-related public event in Malaysia.

Around early March every year when winter starts to give way to spring in the north, large scale bird migrations occur. Tanjung Tuan, Malaysia is one of several places in the region where one could observe the migration. The birds are birds of prey; they are called raptors. Hence, the name, Raptor Watch.

I will coming down to Tanjung Tuan, Malacca from March 9 till 11 with the good folks at MNS. And that is next week! You should come too! This is a once a year event.

Tanjung Tuan is an important stopover for migratory birds. In fact, it has been listed by BirdLife International, a worldwide conservation organization as such. Despite that, the area is under threat. From BirdLife International:

Despite being an IBA, Tanjung Tuan faces very real threats from development. The sea front of Tanjung Tuan is expensive real estate, and as Tanjung Tuan is an extension of the Port Dickson holiday coasts, its value for tourism is high. For many years local authorities have been drawing up plans to develop the area, with the Malaysian Nature Society in turn working hard to keep Tanjung Tuan intact.

IBA is Important Bird Area.

Regardless, this is where the Raptor Watch is important. It informs the public of the importance of Tanjung Tuan in term of conservation:

One of the main objectives of Raptor Watch is to ensure the continued conservation of Tanjung Tuan Forest Reserve by promoting Raptor Watch as a national eco-tourism event.

There will also be recording activities, I would presume, for scientific purpose.

In the previous years, veterans told me that more than a thousand people attended the event. This year, nearly 4,000 people are expected to join MNS in celebrating the migration. Further, the 2007 edition will be the eight Raptor Watch.

And if you are coming down for the Raptor Watch, watch out for the guy that will be solicitating people to join the MNS. That would be me!

Finally, the TV spot for Raptor Watch:

[youtube]ijl4JOxfIFY[/youtube]

Cool, ain’t it?

Categories
Economics Liberty

[1120] Of analogizing free market as democracy

It is Saturday morning and I just woke up from sleep. Being the internet addict that I am, within 15 minutes of consciousness, I was already log onto the internet, reading my bookmark, scouring for news or any interesting reading. Somehow, through random clicking, I reached Wan Saiful’s blog and found myself downloading “Apa itu Liberal dan apa itu Liberalisme?“.

I am not sure what I downloaded it in the first place. It might be caused by the launch of a book entitled, “Apa itu Pencerahan?“, a Malay translation of Kant’s “Was ist Aufklarung?“. Liberals that do not read German might be more familiar with its English title: “What is Enlightenment?” So, perhaps, I took the recurrence of the term “Apa itu… ?” as a sign; I need to read it.

So, I read it with relative ease. With ease because there is almost nothing new in the document; I, proudly, am familiar with almost all the ideas and the cited authors. So, it is dull except at the manner the author argues for free market, which I feel is ingenious.

On the fourth page, in Malay:

…Sebagai contoh, sebab apa percaya bahawa instituisi [sig] ekonomi yang bebas itu lebih adil, pertama sebab pasaran yang merupakan satu pilihanraya setiap jam dan minit. Contohnya A dan B jual nasi lemak, siapa yang menentuka [sig] A dan B boleh jual atau tidak? Yang menentukannya adalah pasar, peti undinya adalah pasar. Jika nasi lemak A tidak sedap dia akan kehilangan undi. Keadilannya terletak di sini.

Roughly in English:

…As an example, why free market institution is fairer than the other? First, the market is an election held every minute. For instance, who would decide A and B could sell nasi lemak? It is the market; the market is a huge ballot box. If A sold low quality nasi lemak, he would lose vote. The fairness of the system is here.

Though the idea is not foreign, I had never seen it stated in such an explicit way that links democracy with free market. I think this is the first time somebody explicitly uses democracy to justify free market.

Perhaps, such presentation of free market it is nothing more than an analogy. Nevertheless, this analogy could be used to entice fervent supporters of democracy that are neutral of the liberal-socialist divide towards free market and to a certain extent, liberal democracy.