Category: Economics

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Economics

[2136] Of import quota policy is irrelevant to the objective of low stable prices

On December 7 in the Parliament, based on the Hansard, Deputy Minister for International Trade and Industry Jacob Dungau Sagan was asked whether the government intends to abolish a policy that grants exclusive permits for imports to limited entities and effectively, the granting of monopoly power to several companies over certain commodities such as sugar and rice. He effectively said no and went on to defend the policy.[1] I find the defense problematic.

He began his defense of the policy by stating it is the responsibility of the government to ensure that prices of such commodities, and specifically sugar, remain at affordable levels while promoting the sugar industry in Malaysia. According to him further, due to the fact that prices in Malaysia are lower than prices in neighboring countries, there is possibility that producers will not import sugar when prices in the international market are higher than local ones.

Approved permit policy however is an very suboptimal solution to the problem. His answer is similarly so.

Firstly, prices are lower because of price control. Remove the control and prices will go higher. If the local prices without price control mechanism is higher than international prices, then there will be no problem of flow. In fact, the approved permit restricts flow into the local market. If it is the other case, then while there might be problem with flow, the policy of approved permits does not address the problem. This brings us to the second issue I want to raise.

Second, import quota is useless when international prices are higher than local prices sans free trade. It is a redundant policy. Why is it redundant? The rationale is the same as having a minimum wage that is lower than all other wages paid by the market. Higher international prices compared to local price however does introduce the issue of flow. There is a way to address that concern and this is why I make the third point.

Third, the existing subsidy system alone is more than capable of ensuring that there is no large major outflow of sugar under the price control mechanism. How? Just pay (really, subsidize) the importers to bring in the sugar.

I wish to veer off course for a moment or two here. Do note that this does not mean that I support a subsidy system. Rather, it is only a demonstration of positive economics. It is not an exercise at proposing the best policy but merely an effort at proposing a better policy. The best policy remains one that returns to the principle of free market.

Returning to the issue at hand, another unsatisfying point the Deputy Minister made in defending approved permits policy for sugar involves price fluctuation. Again, the subsidy system already in place is able to confront that. There is an existing system in place: the previously used fuel subsidy regime.

Really, the import quota policy is redundant in addressing fluctuating prices. Quota itself does not lessen fluctuation of prices. Any considerable fluctuation in the international price of sugar will translate into fluctuation of local prices regardless of permits, unless a country is a complete natural autarky, which Malaysia is not. What it does is merely to increase average local unsubsidized prices. It does not decrease variance around the local average. In other words, quota just makes prices fluctuating at the same magnitude at higher levels.

The relevant policy should be only price control and subsidy to producers and importers. Two tools alone are sufficient to achieve both objectives of affordable and low prices.

I want to harp on this point again, just in case if it had not driven the point home. While it is important to understand that these two policies suffer grave weaknesses — two examples are smuggling and shortage; also opportunity cost — when juxtaposed alongside free market environment, import quota in no way addresses those weaknesses. Therefore, import quota is really an irrelevant policy, if the objective is low stable prices.

The real reason for import quota is to protect domestic producers. The Deputy Minister did mention this as a reason and he should mention only this as the reason without stating that the policy is there to ensure that prices are affordable and to ensure the availability of sugar. The import quota raises price of sugar, with or without subsidy, much to the benefit of importers and producers of sugar.

It is worth highlighting that there are only four sugar factories in Malaysia owned only two entities. These entities also monopolize the quota. Never mind that these two entities are closely linked.

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

[1] — See page 18 the Hansard dated December 7 2009.

Categories
Economics

[2135] Of GLCs are not quite part of the private sector

Second Finance Minister Ahmad Husni Hanadzlah recently made a speech that received a lot of attention. Early in it, he shared that the government is looking to increase the private sector’s contribution to the domestic economy. This particular point would have been exciting if it was not for three reasons. One, he is not the first person to say this. Two, the last time somebody important in the government expounded the idea, the size of government expanded considerably instead. Three, as the minister said, the government means to see this through via government-linked companies. The third point is noteworthy because government-linked companies hardly qualify as part of the private sector.

It is instructive how the definition of a word or a phrase changes over time. Invasion is termed as liberation. Loss of innocent human lives resulting from military action sanctioned by the state is called collateral damage. George Orwell probably drives home the point best with the statement ”war is peace, freedom is slavery and ignorance is strength.”

The term private sector is supposed to describe the sector within the economy that is not owned by the state, where private individuals make private choices with private resources for private gains or losses. Any enterprise owned by the government, and therefore largely utilizes public resources, is part of the public sector. While the break may not be clean because the link between the two sectors in some cases is inevitable, their difference in Malaysia now is far too blurry for it to be meaningful within the context of the speech. The cause of that is years of government intervention in the market.

These interventions come in many ways. Bailouts of failed enterprises by the government are one way where excessive presence of the state in the market can be introduced. Another is through the government’s expressed intention of participating in business that is mostly due to political and not business considerations.

During the Abdullah administration, multiple fully-owned government-linked companies were established as part of the government’s focus on the agricultural sector, as well as its love affair with centrally planned economic corridors. During the Mahathir administration, the focus on manufacturing brought upon the birth of — for example — the state-owned Proton. How the protection of Proton has prevented Malaysia from becoming a regional automotive hub driven by foreign but essentially private sector is well known and needs no further elaboration.

Even when import substitution policy was all the rage in the early history of Malaysia, the government helped create what eventually became favored oligopolies in multiple sectors. These oligopolies continue to exist until today. The creation of a monopoly is not exactly a healthy way to enhance the private sector’s contribution to the economy because most monopolies have the incentive to maintain the status quo. They do this by discouraging adoption of new technology that is crucial to improving productivity and ultimately challenging their dominance to the benefit of society at large. Without improved productivity, it is hard to see how the private sector could increase its contribution to the economy.

Due to those interventions, the understanding of the term private sector has gradually but surely shifted to assume its opposing definition. Observe how strongly linked the domestic economy, specifically the supposedly private sector, is to Khazanah Nasional Berhad, Perbadanan Nasional Berhad and even the Employees Provident Fund, among others. Entities linked to them are countless: UEM, CIMB, Maybank and Sime Darby. Many of supposedly privatized companies are not quite part of the private sector as well.

To label entities strongly linked to these organizations as part of the private sector is tenuous because, like it or not, the government has a strong say in the management of those entities. With that, the government essentially controls the direction of these companies. Given the vast resources available to the government despite its massive fiscal deficit, the government unfairly competes with the true private sector. This unfair competition itself discourages the creation of new entrepreneurs for the inculcation of competitive market, to limit space for the true private sector.

Considering all that, how exactly does the government plan to increase the true private sector’s contribution to the domestic economy through government-linked companies will be interesting.

Does the government intend to instruct its government-linked companies to increase activities in the market and then label such contributions to the economy as privately-driven?

Or does the government plan to increase activities of government-linked companies to increase opportunities for entities from the true private sector? This creates only a culture of dependency. In times when the government seems intent to reduce dependency on the state, this contradicts the effort.

The best way to increase the true private sector’s contribution is to embrace the original meaning of the term. To do that, the government or really, the state, needs to reduce its participation in the market. Bad regulations protecting monopolies and state-owned entities meanwhile require dismantling in order to give true private sector space to expand in a largely distortion-free environment.

The first step to take is for the government of the day to stop overestimating its capability in managing the economy. Humbleness is the key in getting the private sector to improve its contribution to the local economy, especially in a sustainable manner. Rather than trying to expand the role of government-linked companies, the government should focus on building credible institutions capable of accommodating expansion of private sector.

In other words, the government must refocus on its original purpose. That original purpose of a government, without being ideological about it, is governing, not doing business.

Let the true private sector do its work properly without excessive government interference either directly from the government itself, or via government-linked companies.

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 December 17 2009.

Categories
Economics

[2134] Of worst, pro-GST, rationale, yet

Pakatan Rakyat has put forth some bad rationale in arguing against the implementation of GST in Malaysia. Populist argument tend to have bad rationale anyway. But the award for the worst rationale yet, for either pro-GST or anti-GST, has to go to our Minister, Ahmad Husni Hanadzlah of Barisan Nasional:

The implementation of the goods and services tax (GST)is a means of placing the country’s economy at a level that is at par with those of developed nations and in keeping with changing times, said Second Finance Minister, Datuk Seri Ahmad Husni Hanadzlah.

He said the GST implementation gave the government an advantage,particularly in enhancing income flow, which can then be used to implement projects for the benefit of the people.

”Only three countries in the South-East Asian region do not practice this taxation system, that is Malaysia, Brunei and Myanmar. Brunei does not have a taxation system and we will join 143 other countries in implementing the GST.

”We need to change to ensure we stay in the best grouping,” he told reporters after a gathering at the Tambun parliamentary constituency mobile service centre here today. [Husni: GST will put us among developed nations. Bernama via The Malaysian Insider. December 19 2009]

We implement GST “to ensure we stay in the best grouping”, eh?

Unfortunately, these countries are in “the best grouping” because of factors such as presence of strong institutions, respect for rule of law, free market economy, etc. It is not because of GST that they are part of “the best grouping”. These countries may be the same countries that implement GST, but GST is not the reason why these countries are part of “the best grouping”.

Correlation is not causation, my dear Minister. It is not.

Categories
Economics Environment

[2131] Of compensation yes but there are concerns

It appears that Malaysia and other similar countries with significant forest cover may end up as winners out of the ongoing 15th Conference of the Parties to the United Nations Framework Convention on Climate Change in Copenhagen. Whether these set of countries will be net winners are another matter altogether but as far as compensation for maintaining forest cover, or within the context of COP15, carbon sink goes, reports are coming out that this is one aspect that is going pretty well.[1]

The economics behind such compensation is as sound as the economics behind carbon tax or cap and trade. It is about pricing externality.

The difference between such compensation and carbon tax or cap and trade is that the former addresses positive externality while the latter addresses negative externality. That is in econolese. In English, it means paying someone for doing something that affects others in a good way and penalizing someone for doing something that affects others in a bad way. It is about accounting for spillover effect. In a way, it is a full cost accounting.

While I am excited at seeing an economic theory being put into practice, I am curious at how exactly will it be implemented. The biggest issue here is related to opportunity cost. The compensation will have to be big enough to address the problem of opportunity cost faced by owners of forest.

Some forested land may not be opened even without compensation. That put the opportunity cost of such land very low. I would imagine, some countries would not admit to that and instead, would overestimate their opportunity cost. It is not hard to come up with a plan to open up new land, project its economic value to some monstrous value that could be outrageous compared to actual situation and have that as the opportunity cost.

I know, forest has its inherent value. I am sympathetic to that argument. Inherent value however is hard to measure, and no one will pay for it despite all the sound moral argument defending it. The best way to price forest by its concrete opportunity cost: what other alternatives are possible to have a covered land and what is the value of that alternatives?

While I do support such compensation, these concerns must be resolved conclusively. Else, the arrangement will be a farce that only redistribute wealth unfairly.

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

[1] — COPENHAGEN — Negotiators have all but completed a sweeping deal that would compensate countries for preserving forests, and in some cases, other natural landscapes like peat soils, swamps and fields that play a crucial role in curbing climate change. [Climate Talks Near Deal to Save Forests. Elisabeth Rosenthal. New York Times. December 15 2009]

Categories
Economics

[2130] Of sugar prices today and 20 years ago

Sugar price per kilogram in Malaysia in 1989 was RM1.20, according to the Food and Agriculture Organization of the United Nations (FAO).

Sugar price per kilogram in Malaysia today is RM1.45.

If sugar were the only commodity in the world for Malaysia, it would suggest that average annual inflation rate for the past 20 years was no more than 1%.

Based on consumer price index obtained from the International Monetary Fund (IMF), average annual inflation rate for Malaysia within the same time period was slightly above 3%. It is probably safe to assume that salary, over the same period grew at the same rate, with mobility of a person with respect to the so-called corporate ladder fixed.

If every assumption stands, it is clear that sugar has been growing cheaper in real price terms. Since it is subsidized, it has been growing artificially cheaper in real price terms.

I wonder what is the total size of sugar subsidy bill for the past 20 years. According to various articles in The Star, last year’s bill stood at RM720 million. It has to be in the realm of billions. How about in present value? In terms of opportunity cost?

It should be a mind-busting figure.

What a wasteful policy.