[1484] Of it does not work like that, Fomca

This is a weird article, weird in a way that the economic rationale does not make sense at first glance:

THE Government will not increase the number of permits to import wheat flour, as there is enough supply of the commodity in the country, reported Mingguan Malaysia.

Deputy Domestic Trade and Consumer Affairs minister Datuk S.Veerasingam said the price was still fixed at RM1.35, but admitted that the price of wheat flour in the international market had shot up by 70%.

Veerasingam was commenting on a statement by the Federation of Malaysian Consumer Association (Fomca) president Datuk N. Marimuthu that the Government should increase the number of permits to curb price increases.

Veerasingam explained that it would not make a difference if the Government increased the number of permits, as the international market controlled the price of wheat flour. [No extra permits to import wheat flour. The Star. December 24 2007]

Let me summarize that. Fomca is suggesting the government to increase permits in order to reduce price. While that may be the case in typical economic model, given situation in the market, it simply does not work like that.

Even if countless permits are issued to the point that permits are made effectively useless policy-wise, price will not move unless the fixed price regime is done away with. Permits restrict the availability of goods in the market, if the number of permits is below that of equilibrium. The article does not make clear if international prices are higher than local counterparts but judging from the sentiment of the article and current trends, it is likely that that is the case.

What a permit quantity increase will do instead in the current Malaysian context is to widen the availability of wheat flour in the market assuming there is a shortage of wheat flour and by extension, permits, which again, seems the case here.

With higher international prices, there is a upward pressure on local prices. If the local price control mechanism is done away with, price will actually go up to equalize with international prices. Because of that and the fact that Malaysia is a small and relatively open market economy, I do not have a reason to believe the price could actually go down, unless it rains flour. There is no reason to believe that Malaysian prices will significantly affect international prices downward either, if Malaysian prices are forced to be artificially lower than international prices.

One of the few things that will go down is the frequency of wheat flour smuggling from the local to international market. Smaller prices differential between the local and the international markets erodes incentive for smuggling.

Despite that, if Malaysia was an autarky with no opportunity for smuggling activities at all, increase in permits would reduce equilibrium prices, in a market with flexible price regime. So, I think, Fomca might actually be thinking within this framework when the representative made the statement as reported in the article above. But the existence of fixed price regime and higher international price compared to local prices render Fomca’s rationale false.

Nevertheless, I am partial to Fomca calls to increase the permits. Their rationale maybe wrong but hey, when the goal is the same, I am bound not to care too much for the difference in methods in achieving that goal. Increase in permit quantity provides a more liberal atmosphere than the status quo. Of course, nothing beats a total liberalization where free market reigns supreme, providing allocative efficiency to the society.

p/s — After some more thought, I find the whole thing confusing. If international prices are higher than local prices, there will be an outflow of good from the local to international market. So, what is the point of import permits?