Ubah the Hornbill says hi.
Prices of the same tradable items in different places tend to converge in a perfectly efficient market. Theoretically, motivated by profits, individuals and entities act as arbitrageurs. They will continue to arbitrage until there are no more profits to be made. That is when prices equalized and that is the essence of the law of one price.
Prices may not actually converge to one price due to several factors however because market can be inefficient. Limited access to information crucial for the purpose of arbitrage may prevent convergence. Transportation cost as well as government intervention in terms of taxation and subsidization are two of several other important frictions. Instead of prices equalizing, a price spread exists to reflect those frictions even as market participants exhaust arbitrage opportunity.
This is essentially the reason why there is noticeable price differential for the same tradable goods sold in eastern and western part of Malaysia. With the South China Sea separating Malaysia into two parts, it is only natural for prices to differ between the two regions. Even under the price and supply control mechanism that exists in Malaysia, a kilogram of sugar for example, is sold 10 sen cheaper in Peninsular Malaysia than in Sabah and Sarawak. Transportation cost is a considerable barrier preventing actual convergence.
This is a source of discontent for some. Member of Parliament for Kalabakan, Abdul Ghapur Salleh of UMNO said in November 2009 said, “We’re talking about 1Malaysia, but we don’t even have one price” while alleging that the price differential is more insidious in nature — discrimination against Sabah and Sarawak — rather than simple economic friction.
It is unclear how exactly he wants effort at standardization to proceed but the approach by the federal government is clear. In the same month, Minister Koh Tsu Koon supported the idea of standardized prices across Malaysia and proposed that transportation cost be shared by all; in other words, introduce subsidy. Nearly a year earlier, Domestic Trade and Consumer Affairs Ministry wanted to do the same: subsidize transportation cost. In Sarawak itself, perhaps a harbinger preceding a possibly wider similar nationwide policy, the same ministry plans to subsidize transportation cost with the intention of standardizing prices of essential items sold in urban and rural areas under its “One Sarawak, One Price” campaign.
They are turning the law of one price on its head. Rather than letting market forces find its equilibrium where a particular price fits a particular landscape through a narrow band, the government intends to impose unnatural standardized prices for all situations everywhere to force convergence. The government intends to introduce more inefficiency to standardize prices.
The discontent over price differential is overrated. Two economists — Lee Chin and Muzafar Shah Habibullah of Universiti Putra Malaysia — published a paper in 2008 showing that prices of tradable goods between Peninsular Malaysia, Sabah and Sarawak are converging. Furthermore, the recent liberalization of cabotage policy — a protectionist policy that contributed to persistent price differential between eastern and western part of Malaysia — will likely further strengthen the natural convergence trend.
Convergence aside, to iterate the idea of how the difference is natural, the price differential has nothing to do with discrimination between the two parts of Malaysia. It is a reality that there is a large body of water separating the two parts of Malaysia. It is likely that if the transportation cost is brought down either through liberalization or improvement in technology, prices are likely to equalize, all else being equal.
The price differential due to transportation cost or distance has nothing to do with the idea of unity as much as it has something to do with the idea of discrimination. In the United States for instance, gas prices in Michigan and in California are very different. Even in the same state, prices of gas in one town can be different from another town a mile away. That does not make the person who pays higher price as less American than the other person who pays lower price for gas.
This idea can be expanded to Peninsular Malaysia. The government should not standardize prices within Malaysia. This is not to say just prices between Peninsular Malaysia, Sabah and Sarawak, but within those regions as well. What a free Malaysia needs is not a Price Control Act, but a Competition Act or antitrust law to fight collusion among businesses in order to encourage competition — the most effective method at encouraging convergence and low prices — without suffocating entrepreneurial spirit.
On top of that, maybe, just maybe, the move of having manufacturers based in Sabah or Sarawak is a cheaper and a more profitable option compared to the option of transporting goods from Peninsular Malaysia or from abroad even after accounting for various other effects like clusterization.
If the subsidization program goes through, it removes that incentive and hence, the possibility of developing industries in eastern Malaysia. If a business owner could transport his or her goods free from western to eastern Malaysia, why would the business owner locate his or her factory in eastern Malaysia? There are better ports, roads, financial services — practically everything that matters in business — in Peninsular Malaysia than in Sabah and Sarawak. The subsidization program would continue to industrialize the Peninsula while leaving Sabah and Sarawak farther behind in terms of development.
Besides, the Prime Minister recently said that private initiates and market forces have to be given freer rein while subsidies be phased out. The standardization of prices across Malaysia through subsidization of transportation cost by the government clearly contradicts that. Is this a proof that there is no coordination within the government? Or does words mean nothing to the government?
For the answer to be no on both accounts, the policy of “One Price” must be rejected.
A version of this article was first published in The Malaysian Insider on February 22 2010.
Those who value liberty place responsibility on a pedestal. Without responsibility, an entity is undeserving of liberty and deserves admonishment for its oversight. While it is heartening to witness the culture of liberty flourishing in Malaysia, it is unclear if the necessary responsibility associated with freedom is experiencing parallel development required of a mature free society. Many Malaysians are delighted at the prospect of greater freedom but remain unwilling to take up the required responsibility.
Sentiments prevalent in several issues can demonstrate this clearly. The issue of fuel subsidy is one: advocates of subsidy want to consume fuel but are unashamedly unwilling to pay for its fair, free market cost.
Another example, which I would like to go into greater depth, is the discussion regarding the relationship between eastern and Peninsular Malaysia.
I am not at all humored by complaints raised by critical Malaysians in Sabah and Sarawak on how they have been short-changed in the 46-year-old partnership between the two states in Borneo and the 11 states in the Malay Peninsula. Some public discourse in eastern Malaysia exhibit varying levels of hostility to Peninsular Malaysia that sometimes in jest includes the mention of Malayan imperialism. Along with it are matters such as underdevelopment, allocation of resources, immigration and even the date of National Day, among other things.
This hostility is unfair because the peninsular states should not be their punching bag. Only the federal government has the power to effectively address those issues both Sabah and Sarawak face individually or collectively. It is utterly crucial to differentiate between the peninsular states and the federal government. Failure to do so will not solve the problem and is likely to make the problem worse by introducing new ones. Hence, the resentment should be directed at the federal government.
Furthermore, while admittedly the other 11 states theoretically dominate the national legislature, federalism is only rarely a priority item among these 11 states due to years of the centralization policy of the federal government that flagrantly disrespected individual states’ rights. In fact, perhaps that is true for all states in Malaysia, including Sabah and Sarawak. Simply observe the Dewan Negara. What is supposed to be a symbol of states’ rights has been reduced to a rubber stamp of the executive, contrary to the spirit of democracy, even in the crudest definition of democracy.
Actually, even the federal government is unworthy of the resentment. If it has been forgotten, Sabah and Sarawak are part of the federal government. Two factors need stress.
One, Sabah and Sarawak are over-represented in the Lower House of Parliament in terms of population. Both states combined have approximately only six million people but are associated with 56 seats. The other 11 states have close to 20 million Malaysians but have only 153 seats in the Dewan Rakyat.
Two, moreover, as a direct result of the March 8, 2008 general election, both states have unprecedented influence in the federal government.
If the interests of Sabah and Sarawak have not been secured, it is clear that those who are frustrated at national discourse regarding both states should not blame the peninsular states or even the federal government. Rather, their representatives have failed.
Their federal representatives failed because despite over-representation in Parliament and commanding influence in the federal government, these eastern Malaysian representatives failed to effect national discourse. Meanwhile, their state representatives failed because they did not stand up to federal pressure when called upon to do so.
Yet, the majority in Sabah and Sarawak continuously voted for these representatives who sometimes seemingly colluded with the federal government to erode state rights of not only that of Sabah and Sarawak, but all 13 states of the 46-year-old federation.
Ultimately, this is a failure of assuming rightful responsibility. It is a failure of Sabahans and Sarawakians, especially those who are unhappy with the status quo. They demand their rights but they do not stand up and be counted. Thus, they brought this upon themselves and therefore, they have only themselves to blame.
What other conclusion can one draw?
Worst of all, they are shifting the cause of their failure to those on the peninsula. Not only those who cry Malayan imperialism each time the federal government comes in sight failed to act by changing their representatives, they refused to shoulder the consequences for their failure to act by making a scapegoat out of Peninsular Malaysia.
As I said, I am not at all humored.
First published in The Malaysian Insider on September 17 2009.
Trivia: 167 years ago, on this day, Sarawak was ceded by the Sultanate of Brunei to James Brooke.
Trivia 2: Early Portuguese catographers identified Sarawak as Cerava.