Tag: protectionism

Categories
Economics

[2526] Improve real wages by liberalizing the auto industry

The articulation of concern for stagnating wages is well-rehearsed among Malaysians who are just entering the labor force as well as those earning low wages. For most fresh graduates especially, life in the city would be far more painful than it is without the support of their parents.

Regardless of justification, many have complained about rising prices and their disappointing wage levels and growth. While from a strict economic perspective it is arguable that the complaints about inflation are largely exaggerated, based on cherry-picking reasoning and frequently are based on conceptual misunderstanding of inflation, real wages is still an issue. The issue is that it has not been growing as fast as many would like it to, nor do they match their qualifications and capability. The brain-drain phenomenon is partly caused by the concern for wages as well.

PEMANDU targets to double the per capita income of Malaysians in a certain timeframe. Notwithstanding the argument that the target will be achieved even without PEMANDU and that the doubling of income per capita is really more inflationary than real, the target and the relevant plans highlight how wage growth is a pillar of the Najib administration’s policy.

What truly matters is real income. The series of criticism and counter-criticism between REFSA and PEMANDU at least suggests that beyond technicalities that will get policy wonks excited, hostile political maneuvering and a superficial public relations exercise, both organizations are concerned with real income. That is good. That means the mainstream debate is on the right track and the competitive public political sphere to some extent is working.

But even taking the target by PEMANDU in good faith, the plan is overly intricate. For a grand plan that is supposed to be driven by the private sector, it should not be too complicated. If it were privately driven, then the planning should be left to the market’s thousands of private planners working in the go-go economic center that is Kuala Lumpur, not left to central planners working in government complexes in the desolated, isolated and pretentious Putrajaya.

Granted, the PEMANDU plans are a set of national economic policies. Some complexity is inevitable but the truth is that this is a government-driven plan. And it overlooks simple and quick market-based solutions.

One of those policies is the liberalization of the automotive industry.

Prices of cars are amazingly high in Malaysia. This reality is amazing given that fact that cars are easily tradable and Malaysia has one of the most open and trade-dependent economies in the world. The characteristic of tradability and open market should make motor vehicles reasonably affordable. Yet, most cars in Malaysia are overly expensive in general. It takes so much out of a person’s income to own what is a considered a necessity.

The reason for this is protectionism. The industry suffers from punitive taxes and duties all aimed at giving domestic car producers a leg up. Competitive pressure is prevented from pushing prices of both local and foreign cars down to more reasonable and affordable levels. The same competitive pressure has the potential of pushing the prices of even the cheapest cars in Malaysia down.

While this particular liberalization policy does not increase wages, it does improve real wages significantly because the servicing of a car loan can be a major household expenditure. With less restrictive taxes and duties, this particular chunk of household expenditure will decrease, hence improving the household’s real income. More importantly, instead of dedicating a large fraction of income to servicing car loans, newly freed income can be used to purchase other goods, services or simply saved. To put it simply, they can do more with less.

The attractiveness of the liberalization is not just about improved real income. It is also about improving real income almost immediately. Contrast this to the intricate plan to double the headline wages of Malaysians by year 2020 by propping up small inefficient sundry shops when large retailers can do the job much better due to their economies of scale. This begs the question, why should Malaysia do this the hard, expensive, incentive-twisting way when there are quicker, simpler and more organic solutions?

There are other considerations of course, like the fate of those employed in that particular inefficient local industry.

It is true that there will always be winners and losers but the comeback point is that there will be more winners than losers: the losers are concentrated in a particular industry which is small relative to the whole economy to start with, and the winners are widely dispersed throughout the economy on a much larger scale. On top of that, the newly unused income will create new permanent demand that will likely be able to absorb the temporary disruption in the labor market and redirect resources, both labor and capital, to better use, all without too much overbearing government intervention.

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 March 23 2012.

Categories
Economics

[2431] Two cheers to San Miguel

The sale of Esso Malaysia by ExxonMobil to San Miguel of the Philippines is a done deal. But it was not completed before economic nationalists sounded the alarm. They feared foreigners would seize control of strategic assets within the country while seemingly ignorant of the fact that ExxonMobil is a US-based multinational corporation in the first place.

The more discerning economic nationalists hoped, demanded and appealed to ExxonMobil to sell all of its shares to the locally-based Lembaga Tabung Angkatan Tentera (LTAT).

Luckily, the jockeying was to no avail. Why luckily? Here is a question for consideration: Were these economic nationalists interested in the welfare of Malaysians?

I would say no.

This is a pertinent question given that LTAT already owns Boustead, which in turn operates petrol retailer BHPetrol. To have LTAT controlling Esso Malaysia would likely reduce considerable competitive force within the industry, if there were any to start with. More importantly, it would turn back the clock on any effort at introducing competition in an industry already stifled by government regulation and effective monopoly.

The LTAT path advocated by economic nationalists in Barisan Nasional, Pakatan Rakyat and whoever else would reduce competitive pressure in the area, and it would also exacerbate the already adverse relationship that exists between the government and businesses.

With the government already involved in various industries, what ensures that the government has the interest of actual individual Malaysians in mind instead of the profits of various government-linked companies — or in the latest case of the economic nationalists’ wet dream, the profits of LTAT and its companies?

This is an organization that is already mired in a controversy revolving around opaque military procurement which is closely related to yet another case of conflict of interest. How is it not a conflict of interest when LTAT is the major beneficiary of various military contracts while at the same time being a retirement fund for armed forces of Malaysia? And let us pretend that unlike the experience of Indonesia and Egypt, a military with direct or indirect business interest is an ingredient for the creation of a healthy civilian government.

Real business concerns run mostly on a profit motive. It cannot afford to entertain nationalistic sentiment. If it does entertain nationalism, then it typically seeks to manipulate such sentiment to its own advantage. Proton is one such case: save Proton, buy Malaysia. Or Malaysian Airlines: save MAS, fly Malaysia.

It is not a phenomenon unique to Malaysia of course. In the United States, General Motors and Ford have from time to time brandished their American credentials to American consumers. Many businesses in the past have also employed economic nationalism to justify protectionism in these business favors.

Zooming back to Malaysia, economic nationalism takes the extra step of merging business interest with government interest, thus making the issue of conflict of interest two-fold: government protecting its profits rather the interest of its citizens, and businesses manipulating government powers to advance business interests at the expense of citizens. It is a symbiotic relationship between government and business that turns the very components of a free society into parasites, living on taxpayers’ sweat.

Such perverse incentives cannot be good for the welfare of Malaysians in general.

For these two reasons, the sale of Esso Malaysia to San Miguel should be celebrated.

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 September 18 2011.

Categories
Economics

[2335] Free trade in rice is good for Malaysia

The Food and Agriculture Organisation recently warned food prices are at record levels in both nominal and real terms since the entity first published its Food Price Index in 1990. The International Monetary Fund stated this is unlikely to be a temporary trend.

Rice generally has not shown the kind of increase exhibited by other foodstuffs, however. For Malaysia, where the majority considers rice a staple food, this is good news. Yet, it is probably just a matter of time before prices begin to increase.

Rice prices did hit outrageous levels in the past years. In 2008, it rose so high that it triggered some kind of a panic in a number of rice-consuming countries.

In Malaysia, shortage was reported in some places. The Abdullah administration tried to address the concern by purchasing an emergency supply from Thailand.

Implementation of rice exports ban by several of the world’s largest exporters of rice exacerbated the increase in price. Two particular countries that imposed the ban were India and Vietnam. Both make up more than 25 per cent of the world’s rice exports currently.

The impact of high rice prices, the role of rice as staple food and the implementation of exports ban are important while considering the following fact: According to the agriculture and agro-based industry deputy minister, imports fulfilled 30 per cent of Malaysia’s domestic rice consumption in 2010. Malaysia sources some of its rice supply from India and Vietnam.

The protectionist policy works for exporting countries by isolating domestic prices from international ones, if the goal is to have low prices in the domestic market. With less competitive demand for domestic rice, domestic prices will fall or at least it will not rise as fast as world prices given specific circumstances.

Governments around the world are aware of the adverse effects of high food prices for their respective society. Examples are aplenty.

In 2007, Mexicans took to the streets protesting against rising corn prices. Rising food prices — specifically bread — is partly fuelling the ongoing protests and revolution in the Middle East.

In short, at the macro level, a ban benefits the exporting countries at the expense of the importing ones.

What solved the issue of rising world prices was the financial crisis that began soon afterward. The protectionist policy gave way to other pressing concerns.

The respite from expensive rice is appearing to end. Eventually, the concern for rice supply and prices will take centre stage again and so will the protectionist policy of exports ban.

The concern is not theoretical. India continues to maintain an exports ban on non-basmati rice. Myanmar recently imposed a ban to slow the rising price.

For importers of rice, it is in their interest to have exporters remove the exports ban. That will mitigate the rise of global prices. This is a concrete example of how free trade benefits Malaysians and how protectionist policy hurts.

There is a silver lining to all this, if it could be called that. Rising prices coupled with the prevalence of exports ban is causing countries like Malaysia to boost its own rice production. Yet, a domestic production boost is at best a second best alternative to the free trade scenario.

The free trade scenario is cheaper in terms of opportunity cost. Trade enables specialization and that frees up resources for other more productive endeavors that Malaysia might embark upon.

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 March 24 2011.

Categories
Economics

[2224] Of merger or not, get the government out first

Malaysian national carmaker Proton celebrated its 25th anniversary yesterday. In conjunction of the celebration, Prime Minister Najib Razak said, as reported by The Star, “[i]f overcapacity is a limiting factor to the companies, should the process to merge automotive companies in Malaysia be done so that it will create a company that is stronger or bigger and more capable?“[1]

This has been interpreted by the media as a call for merger instead of a hypothetical question. The managing director of Proton echoes the call for merger.[2]

With the government having business interest in Proton — the government is likely to have the same interest in that merged entity — it inevitably raises the question of protectionism. It becomes the government’s interest to protect that giant local car maker.

The government of course does have interest in Proton but the larger the carmaker becomes, the harder it is for the government to resist the tide of protectionism.

There was a time when Proton was the monopoly in Malaysia, and backed by the government wholeheartedly in form of tariff on imported cars. The tariff was obviously introduced to protect Proton. Or in the words of protectionists and nationalists, to encourage the local automotive industry. Unfortunately for protectionists nationwide, the policy stunted the growth of local automotive industry and helped Thailand emerged as the ‘Detroit of Asia’.

Not that Detroit is the hallmark of the automotive industry…

The policy limited  options for a majority of local consumers. What made it worse was that only not-so-high quality cars were available to a whole lot of us.

That is less of a case now due to ASEAN Free Trade Area Agreement that demands the abolishment of tariff between ASEAN countries.[3] Still, import duty on vehicles originating from outside of ASEAN is as high as 30%, signaling protectionism. The involvement of the government in the automotive business heightens the concern. There is no guarantee protectionism of the past will not repeat itself.

It may make business sense for local car manufacturers to merge but I am in the opinion that such call for merger should come from the industry, and not from the government. That means the government has to exit the industry first. Let the carmakers fight their own fights without dragging the taxpayers into it.

Once the government is no longer wedded to the carmakers, there would be less room and possibility for the government to protect the car industry. The consumers meanwhile would have the opportunity to make choices unadulterated by protectionism.

Whether there should be a merger or not later on, that is less of my business or that of the government. That would be entirely up to local car manufacturers, and probably the regulators if the anti-competitive bill is passed.

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

[1] — KUALA LUMPUR: Local automotive companies could merge to create a bigger and more capable company, proposed Datuk Seri Najib Tun Razak.

The Prime Minister said one of the ways to overcome the issue of overcapacity in production was for the industry to consolidate.

“The automotive industry in Malaysia needs to undergo a process of re-looking at its structure, to determine whether it can ride all challenges.

“If overcapacity is a limiting factor to the companies, should the process to merge automotive companies in Malaysia be done so that it will create a company that is stronger or bigger and more capable?” he said in his speech at the Proton 25th anniversary celebrations last night. [Merge automotive firms to create bigger and more capable company. The Star. July 9 2010]

[2] — KUALA LUMPUR, July 10 — Proton’s managing director Datuk Syed Zainal Abidin Salleh Mohamed Tahir said that the consolidation of local automotive companies is important to ensure that the industry remains competitive.

He said that mergers were a step forward in the liberalisation of the automotive industry.

“I think it is timely and it is the most natural thing to do. I think we need to sit down and discuss on how to do it properly. I think it is a good way forward to prepare the entire eco-system for liberalisation and it will make us more competitive. The government has already made the call and I think it is time for the people in the industry to sit together and decide what is best,” he told The Malaysian Insider. [Proton chief says mergers future of local car industry. Asrul Hadi Abdullah Sani. The Malaysian Insider. July 10 2010]

[3] — See Duties and taxes of motor vehicles. Malaysia Automotive Association. Accessed July 10 2010. For example, from the MAA, the following schedule for cars:

Import Duty Local taxes
CBU CKD MSP CBU & CKD
Engine

Capacity (cc)

 MFN ASEAN

CEPT

 MFN ASEAN

CEPT

 MFN ASEAN

CEPT

 Excise

Duties

 Sales Tax
< 1,800
30%
0%
10%
0%
10%
n.a
75%
10%
1,800 – 1,999
30%
0%
10%
0%
10%
n.a
80%
10%
2,000 – 2,499
30%
0%
10%
0%
10%
n.a
90%
10%
Above 2,350
30%
0%
10%
0%
10%
n.a
105%
10%
Categories
Economics

[2076] Of anti-trust laws can defeat protectionism

Opponents of economic liberalization fear, among many other things, the possibility of giant foreign companies dominating the local market at the expense of local businesses. For those who are simply interested in better quality goods and services, market liberalization introduces competition in the market to improve quality, much to the benefits of consumers. While the war between the two camps is much relished, there is a middle ground for both to tread on and it involves anti-trust laws.

Increasingly in Malaysia, protectionist argument is becoming less and less relevant each time the sun rises and sets to rise again. Intellectually, it is bankrupt. Empirically, it has resulted in missed opportunities and needless sufferings. Examples of protectionist failures and its subsequent ejection are aplenty for all to observe.

Proton, for instance, is still unable to compete fairly despite years of protection granted by the government to the national enterprise. It has also cost Malaysia an opportunity to become a regional center of vehicle manufacturing that Thailand has become. Thankfully, such government protection that once resulted in effective Proton’s monopoly of the local car market will end by 2010, in line with the ASEAN Free Trade Area Agreement.

Another example relates to the imposition of cabotage between Peninsular Malaysia and East Malaysia. With intention of nurturing local shipping companies, it has caused unnecessary increase in cost of living of Malaysians in Sabah and Sarawak by hiking up transportation cost. Tradable goods became more expensive than it would have been under free trade environment. Again, thankfully, despite protest from local ship owners, the removal of the protectionist policy has been successful. Malaysians in Sabah and Sarawak can expect their real wages, ceteris paribus, to go up, thanks to liberalization.

Even as the roles of government see expansion all over the world in the aftermath of the global recession through massive fiscal policy and more, the rationale of liberalization in Malaysia continues to take root. While guarded optimism is called for, recent liberalization of multiple service subsectors as announced by the Najib administration is a proof that — to paraphrase slightly the Iron Lady Margaret Thatcher — liberalization is on the move.

The liberals are winning the intellectual jousting. Yet, this is no time for liberals to rest. This excellent opportunity to push for greater freedom — either economic or individual freedom, although the two should be inseparable — does not come as frequently as it should. With a government seemingly friendly to liberalization policy, there is no better time to push for greater liberalization.

Greater liberalization is required because illiberal market structure like price and supply control mechanism on essential goods such as sugar and flour are still imposed by the government. Just weeks ago, shortage occurred to rudely disrupt routine to remind all of inefficient market.

With momentum on the side of the liberals, they can afford to push liberalization forward. Shoving the agenda is especially easy when discredited protectionist ideas are demonstrable as actual and not merely as theoretical failures.

In spite of cache available for liberals to rely on, continuous shoving of liberal economic agenda does not create ally and it only alienates losers of liberalization.

As a sidetrack, liberalization does create losers but the rationale of liberalization, or actually, free trade, is not that it does not create losers, but rather, on average, it lifts all boats up. This should be juxtaposed harshly with the effects of protectionist policy, which may or may not create winners but guarantees everybody, on average, worse off.

Liberalization exercises are definitely colliding with the New Economic Policy, or whatever is left of it. While it is unclear if there is a majority who supports the policy any longer, there is no doubt that there exists a large segment within Malaysian society who do support it and see liberalization exercises as threats.

On top of that, local business owners, Malay or non-Malay alike, are likely to be hugely unexcited with liberalization effort that inevitably invites large multinational corporations with enjoy economies of scale that these locals could only imagine.

Together, these groups have the political power to derail liberalization exercise in the future.
In order to reduce that possibility, it is imperative for liberals to reach out to the potential losers and their sympathizers to partly, wherever reasonable, alleviate their fear. And their fear of monopoly is reasonable.

Perhaps, the act of reaching out should be an afterthought. The fear of monopoly, after all, should not exclusively belong to only protectionists and their cohorts.

Economic liberals celebrate competitive market. Purely competitive market is of course unachievable due to a myriad of factors but that does not prevent liberals for achieving second best solutions that approximate idealized environment.

The practice of anti-competitive behavior especially by colluding companies with excessive market power hurts the prospect of superior competitive outcomes associated with the ideas of free market.

Anti-trust laws may be able to curb anti-competitive practice. It has the ability to reduce the entry cost for newcomers, which can realize the spirit of creative destruction that every incumbent and even more so, monopolies, fear, despite its positive effect on society at large. Through this, protectionists’ fear should be somewhat addressed. And when it is addressed, liberalization can continue with its forward march to actualize the idea of liberty.

For liberals, the law has to be applied in equal weight. All monopolies, either local or foreign, should be subjected to the same law. If it is unclear, this means it must include government-linked companies as well as local cartels formed by private firms.

This cannot be stressed enough. Anti-trust laws directed at only foreign companies is only a protectionist’s tool and not an enabler of competitive market. Worse, without covering government linked-companies, such imperfect anti-trust laws would only open the path towards greater government intervention in the market.

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 September 7 2009.