Category: Economics

Powder kegs that are too close to the fire. That is the situation in Kuantan right now.

Local residents frustrated by the rampant bauxite pollution are beginning to take matters into their own hands. Threats have been made and carried out. Trucks carrying the mineral burned by the angry mob. Vigilantism is on the rise.

Vigilante justice is always worrying but it is hard to blame the local residents for resorting to it. When non-violent ways failed to address their grievances, they are left with less than desirable devices. Like it or not, vigilantism is a solution available when the typical mechanisms ”• market and government ”• are not working.

The free market usually provides robust solutions to a myriad of problems big and small. But such a market does not exist magically out of nothing. It is a human institution running on implicit human rules arising from our daily interactions with other fellow beings. As with any human creation, it can be imperfect. At times it can fail disastrously.

The market will disappoint the strongest supporters of the laissez-faire approach when too much of profits are privatized while too much of costs are passed on to the public with impunity. In economic jargon, that cost is called negative externality.

The tragedy of the commons is the oft-cited theoretical example of market failure involving extreme externality. Without any intervention to correct the misaligned private and public incentives, the benefits will be exhausted and the commons will collapse.

The negative effects of climate change are examples of market failure of global proportions.

Closer to home, I would submit the massive bauxite pollution in Kuantan, Pahang as a disturbing local case. The miners and the landowners reap their windfall profits but the rest bears the cost of the pollution.

Heavy red dust now contaminates the local air and water supply and that creates severe health threats to residents. One can only imagine the fate of whatever wildlife left in the plantations where the topsoil has been removed to feed China’s ferocious appetite for more bauxite.

When the market fails, then it is the responsibility of the government to step in and realign the diverging private and public incentives to produce a better outcome for both sides.

The typical solution involves taxing mining activities heavily, imposing strict production quotas or regulating the industry tightly in some ways to force the beneficiaries to take into account the disregarded general welfare.

But from the very beginning when the mining began, the government at the Pahang state level is not doing its job as the industry regulator and as the guardian of public welfare. Not enough has been done to correct the market failure. By definition, that is government failure.

Factors contributing to market failure mostly are innocent despite the grave consequences as it usually involves people minding their own legitimate business. It is always the government’s job to understand those businesses so that if there is any negative externality or conflict, then the authorities can come in and arbitrate any dispute. Any libertarian mindful of market failure will take this as one of the major roles of government.

In contrast ”• if it is not incompetence or inadequate powers ”• government failure is almost always about conflict of interest. In the case of Kuantan, it does seem like yet another case of conflict of interest.

For one, reports suggest the Pahang state government received more than RM37 million in revenue last year from bauxite mining. That figure will increase significantly once the state government doubles its current tariff rate on production to RM8 per ton.

The sum is significant for a government with a budgeted spending close to RM900 million in 2015. In a country where the concept of separation of powers is weak, the state’s fiscal interest can be hard to overcome.

But more troublingly, there are pictures circulating on the Internet, creating the allegations that some of the landowners enjoying the modern day gold rush are quite influential and close to the state government.

Information from the Internet may be wrong. While the local media has done a good job at reporting the impact of the pollution, not too many are investigating the identity of the landowners and the miners. Perhaps that is the cost of the culture of fear we have in Malaysia. Public welfare is suffering from gross disrespect for free press.

The federal government has come in to suspend the mining activities temporarily to order to study whether any environmental law has been breached. It is unclear if the suspension will mean anything or even be effective but one thing is certain: the issue falls firmly within the ambit of the state while the federal government is even more reluctant to do anything conclusive especially since Pahang is the political base of the prime minister. With so many troubles in other states, would he risk the ire of local politicians to do the right thing?

These are disheartening facts. Unless the conflict of interest is addressed strongly, the state and the federal government will likely continue to do too little, thus guaranteeing the continuing government and market failures.

I fear, at the rate we are going, the whole episode will lead to a period of persistent vigilantism. Down that slope ”• however far down the slope is ”• is a general breakdown in law and order. Miners are already employing thugs to protect the trucks from vigilantism. That sounds awfully close to anarchy.

But then again, does law and order mean anything these days? When the top leadership has no moral authority, will the so-called Little Napoleons down the line be impressed by any necessary directive from the top?

  First published in The Malay Mail on January 5 2015.