Tag: automotive industry

Categories
Economics

[2599] Don’t auction it. Abolish it

Let me begin by stating that I support a significant cut in in duties and taxes on cars.

There are at least two reasons for that. One, the cut will allow market forces to work better so that we can have a more efficient environment. A simpler market arrangement will free up resources dedicated to an elaborate system that was initially designed to protect the domestic car industry at the expense of Malaysian consumers. Two, the cut will enhance consumer welfare, which is in some ways a restatement of the first rationale. It improves welfare because with cheaper cars, the same personal resources used to purchase cars can be used for something else.

Along the same vein, I also support the abolition of approved permits.

Theoretically, permits can make the market more efficient but only in the cases of market failure. Permits help redistribute resources better when the market cannot self-organize due to cost being individually unaccounted. When there is no market failure, a permit system causes inefficiency. Indeed in the domestic car market, the permit system adds to the cost of a car, adding inefficiency to the system. I do not see any market failure in the car market and so, in the name of efficiency, approved permits should go the way of the Proton Juara.

I am not the first to say this because the issue is not new. It has always been talked about in the background but it is only recently that it gained very public attention and it is all because of Parti Keadilan Rakyat’s Rafizi Ramli. He has been consistently raising it in the way that it forces the government to reply. The fact that the national election is around the corner, somewhere out there, helps too.

Putting the issue to the middle of the table is good. It is good because it raises the profile of a real and significant issue that affects welfare of Malaysians. Now we have one more policy debate and it is something concrete to talk about, away from the typically unfulfilling issues of race and religion that most times are superficial. That alone gets the thumbs up from me.

Rafizi proposes to make passenger cars in the country more affordable by eliminating or reducing the high duties and taxes imposed on cars. I do support that.

The latest turn in the debate revolves around the approved permits for cars. It is here where I find his position on the matter disagreeable.

He proposes to auction the permits and sell it to the highest bidders. That has caused him to be criticized by those supporting the status quo, others are against it as it is inconsistent. If the permits are auctioned to the highest bidders, then car prices will go up. This will be contrary to the aim of making cars more affordable.

He defends his proposal by stating that the abolition of duties and taxes on cars will ensure that the total price of car will be lower even with auctioned permits. How is that so? He asserts that the permits at the moment fetch prices between RM40,000 and RM60,000 and so, he expects that the same price levels will prevail in an open bidding system as well. This is the assumption that allows him to mount a defense against the criticism. He assumes every cost component as constant except for duties and taxes, which are significantly reduced or eliminated.

In my opinion, the criticism against Rafizi is justified and his defense is no defense. The reason is that his assumption of everything being constant but duties and taxes cannot hold. The reason is that there is no guarantee that the permit price must be in the range he stated.

An auction is a very efficient method at ensuring that the seller gets to sell his goods or services at the highest price possible. And if there is enough demand for permits while supply is limited, then ceiling price can be as high as the sky.

We do not know how high the bid price for permits can go right now. We can only assume and Rafizi assumes that the price range he cites is the benchmark.

Unfortunately, his assumption depends on one question: is the price range cited the result of open bidding among many auction participants, or a negotiated outcome within a small circle?

It is very possible that it is the latter. In the latter case, there is every reason to suspect that the price range cited is too low. Have an open tender instead and microeconomics will work its magic to push that range up to the appropriate level. I do not know how far up it can go. For all I know, the permit price can go up high enough that it may undo any reduction in car price resulting from the abolition of car duties and taxes. The only way to find know is to actually run an auction for the permits. Now, there is context to the auction debate. Those against the effort to cut duties and taxes on cars are worried about government revenue loss. Rafizi counters that that concern can be addressed by auctioning the permits. He is right about how an auction can address the worry, given how the current distribution system of permits is at best inefficient (since the government does not get the full value of the permit), and at worst corrupt.

There are other ways to address the concern about government revenue loss while being consistent with the objective of making cars more affordable. Auctioning the permits is just not one of those consistent solutions.

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 21 2012.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
n/b — for economic literates, this was written with quota quantity (or its relative quantity to total cars in Malaysia) unchanged. With significant increase in the number of quota, it’s possible for prices to fall even with auctioned permits under perfect competition and perfect pricing. If the quota remains unchanged and auctioned, no cut in taxes and duties will reduce prices. In fact, prices will remain the same in theory.

Categories
Economics

[2571] Cars, duties, congestion, pollution, revenue and income effect

Several new points were raised with regards to my post on duties and cars yesterday. One was pollution, two was government revenue and three, in one way or another, income effect. It is not exactly income effect but close enough.

Concern number one is easy. But let us state the pollution concern. The concern is that there is already too many cars on the streets and there is a need to reduce pollution, which I take as carbon and other greenhouse gases emissions. I also take that as actually reducing the number of cars. But here is the thing, substitution to foreign cars may actual reduce emissions without having to reduce the number of car on the roads. The reason is that comparable foreign cars-European, Japanese and possibly Korean-have higher emission standard than locally-produced cars. With more competition, consumers have a chance to choose emission-efficient cars over relative gas-guzzlers without too much price variation. End result: less emission given the quantity of cars.

Concern number two deserves a very libertarian answer. Cut government spending instead. The duties on foreign cars were always meant as protectionist measure, not primarily for revenue-generating purpose. The revenue derived from the duties should really be considered as a bonus. Except that the government is so used to it, that it forgets. With the fiscal discipline, they need the bonus. One way to cut spending is to cut fuel subsidy. In fact, tax it. Yes, tax fuel purchase.

Concern number three is harder to address and I actually thought about it but ultimately decided to not touch it. As try to explain it below, you will understand why I decided against touching it.

Income effect (not exactly but close) or specifically, the new competitive environment may push prices down across the board. This may be true and I have alluded to this in an article I wrote for The Malaysian Insider earlier. In turn, this may increase vehicles on the road as more are able to purchase cars. Or it may not. There is a sound theoretical case for an increase, but there is also a sound theoretical case for the opposite.

Initially, I wanted to address this in terms of stickiness and temporally. In English, prices will adjust only slowly to a new reality. More technically, all-in prices of domestic cars are sticky and that of foreign cars are not.

Why do I apply stickiness on domestic cars but not foreign cars? It is because the abolition or the reduction of duties is easy to calculate. It is on top of the car price in the sense that pre-duties prices are associated with the way companies run their business. It is this pre-tax, pre-duties prices that are sticky.

Most of domestic car prices are made up of sticky components. For foreign-manufactured cars, a significant portion of its end prices are made up of non-sticky components, i.e. the tax and the duties. This is why I apparently apply stickiness only on domestic cars. In truth, I am applying stickiness on both domestic and foreign cars while taking into account domestic cars have significantly less portion of non-sticky components than foreign cars, within the context of import duties abolition.

Also, consider this. The net earnings of Proton in 2011 was not even 2% of its revenue. How much room Proton has for a serious price war? Not much in the near future. This, I think, is an indication that there is a price floor: there is not much incentive to push price of sedans down too much beyond whatever Proton is charging. Proton cannot charge less anyway.

So, in the short term, the specific income effect will not be present. And no traffic congestion issue.

The long term issue is hard to say. It depends on non-cooperation (it is quite possible for firms to achieve implicit understanding in price settings without getting into trouble with anti-trust law).

Ultimately, it depends on how efficient those under pressure can be. What is certain is that that takes time.

It also depends on how low prices would get. I have not done the calculation but I have a feeling, both Proton’s small margin and game theory will provide a floor how low prices can get. And foreign manufacturers definitely would not want to price their cars so low as to earn a loss. Furthermore, that would be dumping and they will get into trouble with that.

So, in the long run, it may, or it may not have effect on congestion.

Besides, if there would be worse congestion, it would be very naive to think there is no other accompanying policy to address it. I have one immediately in my mind: congestion fee within the cities.

Categories
Economics

[2570] Abolition of import duties on foreign cars will not increase congestion because there is substitution effect

I advocate the abolition, or at least a significant reduction of import duties (and other excessive taxes) on cars as well as the abolition of the approved permits system that blow up the prices of foreign-manufactured cars to an outrageous level. This should come at no surprise because I am a libertarian. I do generally support freer trade. Make no mistake, the policy on cars is a protectionist policy.

There is a concern that if duties on imported cars are slashed down significantly or abolished entirely, this will exacerbate traffic congestion in Malaysian cities. At first, this sounds like a very big and legitimate concern. It is not.

If one understands that the duties are imposed on foreign marques and that there is such a thing as  substitution effect, one will understand that the concern on worsening traffic congestion is misplaced. I suspect it is almost always raised by those without enough formal education in microeconomics.

Do understand that imposition of high duties are on foreign cars. This is the nuance. Too many talk as if it is applied across the board, including on Proton and Perodua marques. The peril of generalization is that you lose the nuance.

The duties make domestically-produced cars cheaper than foreign cars and this should be a no-brainer.

It is no coincident that a majority of cars on Malaysian roads are Protons and Peroduas. Malaysians buy Protons and Peroduas because those cars are cheap. There are not too many of those who can buy more expensive cars. If I recall correctly, the number of Protons and Peroduas and other locally-produced cars dwarf the number of foreign-manufactured cars in this country. I do not have the statistics at home but I do have it at the office. I will share it tomorrow and correct my assertion if it is proven to be incorrect.

If foreign cars are suddenly competitively priced after the abolition of various pre-exisiting duties imposed, new buyers will be tempted to purchase those foreign cars, which are many ways of higher quality than Proton at least. Perodua probably can stand up within its market niche.

Now, if the duties persist, these new purchasers would probably buy Protons and Peroduas.

Notice that there will be purchases of car anyway.

To put it in clearer terms, if the status quo remains, people will buy local cars. If it does not much to the benefits of Malaysian consumers, they will buy higher quality foreign cars. For those whom would have bought foreign cars anyway, it does not matter as far as traffic congestion is concerned. They would still buy their cars. It is not about discriminated duties that Malaysia has that I along with others like-minded persons want abolished.

So, the concern for traffic will exist as long as Malaysians purchase cars and it really does not matter whether the duties are abolished. The trend for greater quantity of cars on the road is really a secular one. It has to do with affluence growth and population growth more than anything, and the availability of a reliable public transport system within this context.

Those who argue that the traffic condition will worsen if those duties are removed just do not understand that those cars are substitute goods.

This does not mean the abolition of import duties do not matter. It matters in terms of welfare. It matters in terms of competition. It matters in a lot of other more important ways. But not in terms of congestion.

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.