Tag: monopoly

Categories
Economics

[2406] Better food stamp and the wider context

The Malaysian government may introduce what seems to be a non-tradable food stamp program to combat high food prices. The goal behind it is noble. While that is so, it must be noted there are at least two ways to improve the outcome of the program. Moreover, the issue of high food prices should be assessed more holistically.

First, tradable food stamp will likely improve recipients’ welfare more than mere non-tradable arrangement can. Tradability will widen the recipients’ choice set and give them the opportunity to smooth their consumption. Furthermore, they may not always require subsidized food. Tradable stamps will allow the recipients to exchange the stamp for other items of need or even cash. Such exchange tradable stamps will widen the welfare-improving effect of the program by implicitly covering those who are not explicitly covered by the program. Whatever the price of sale of the stamp, it is will be lower than the face value of the stamp for otherwise, the stamp will be worthless. This essentially means the uncovered purchasers of the stamps will also be subsidized.

Second and perhaps the natural expansion of the first option is a direct cash transfer. From public finance perspective, this is likely to be the most efficient solution within the restrictive goal of enhancing the welfare of specific group of individuals.

Regardless of the costs and benefits of food stamp, high food prices in general is a wider issue. The wider context is important.

One context is the fuel versus food debate. Government policy on biofuel may have inflationary effect on food prices. As reported by Reuters in March 2010, the biofuel policy was supposed to start in June 2011.

The other more pressing context is monopoly of foodstuffs in Malaysia. Exclusive monopoly and quota granted to specific entities on various foodstuffs cause the very problem that the food stamp program aims address.

There are plenty more examples demonstrating contradictory and convoluted government policy.

Perhaps the problem of high food prices is better addressed by undoing unproductive government interventions in the food market. These interventions benefit only specific parties instead of the wider public. Without these interventions and with a little bit of luck, the rationale for food stamps might disappear. More importantly, public welfare can be improved without spending too much public money.

Categories
Economics Politics & government

[2360] Competition Act is a farce

Competition puts a downward pressure on prices. It is one of the forces behind innovation. It enhances welfare. Therefore, initiatives aimed at creating a competitive market are worth supporting.

For those who truly believe in a free and competitive market, however, the Malaysian Competition Act passed last year deserves neither admiration nor respect. It is worthless.

How can one respect the Act when the government itself is unimpressed with the spirit of the Act?

This question is especially pertinent after the Najib administration recently granted Bernas with another 10-year monopoly over rice imports in Malaysia.

The Act will be enforced in 2012. One would expect any government that is sincere or serious about encouraging competition to prepare the ground. What we are seeing instead is business as usual. Instead, the government continues to grant monopoly power to a specific company without any regards for the Act.

Government-sanctioned monopoly is not a phenomenon exclusive to the rice market. In the sugar market, the government awards import quota to a limited number of sugar producers. Here is something that makes it even more interesting. Tradewinds effectively monopolizes the sugar market, and it is related to Bernas.

In Sarawak, there is CMS Berhad, which has a disproportionate access to government procurements and tenders. It is the grand monopoly of Sarawak and it is a prime target for a proper anti-trust law.

One must not forget the various government-linked companies. They are so large and so powerful that their ability to distort the market is not doubtable. What makes it worse is that, one would rightly expect these companies to sleep in the same bed as the government, at the expense of consumer welfare.

The government after all has an interest to see that these companies are profitable because the government is the shareholder. For companies that it only has an indirect relationship with, bad performance is just bad politics.

In the name of competition, a respectable anti-trust law must subject everybody under the same rules.

Yet, ”activities, directly or indirectly in the exercise of government authority” are excluded from the Act. Companies that obtain their monopoly power through a government authority like Bernas easily fit the bill. It is also easy to argue that GLCs will enjoy the exemption as well.

Even if that stated exemption does not cover those companies, the Competition Commission as established by the Act has wide discretionary powers to exempt anybody from the Act. With a perverse incentive system that exists within the government, selective prosecution will likely be the norm. Private firms that attain large market share through sheer ingenuity will be prosecuted in the name of competition while GLCs and companies like Bernas continue to be shielded from market forces by the government.

In short, not only does the Act not encourage competition, it is a tool to make the market less perfect.  This Competition Act is no anti-trust law. It is a discrimination law.

The truth is that competitiveness of the Malaysian market can be enhanced without this Act, which shamelessly masquerades as an anti-trust law.

Government policy created these monopolies and because of that, it is arguable that a proper anti-trust law is like taking a sledgehammer to a nut. Instead of expanding the role of government, a reduction can be just as effective as a proper anti-trust law. Such a retreat will definitely be more effective than the farce that is the Competition Act.

This is how a retreat should look like: The government to divest away from most GLCs, to institute an open and competitive process to most of its procurements and to stop granting monopoly powers to the likes of Bernas. Do all that and with a little luck, even a real anti-trust law might be redundant.

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 May 4 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.

Categories
Economics

[1857] Of IJN privatization may create monopoly

Sime Darby is interested to acquire the National Heart Institute (Institut Jantung Negara; IJN) on Jalan Tun Razak from the government.[1] My default position has always been that the government should do what it does best and that is governance. With this, privatization is a natural path to take. However, it is unclear if the deal is desirable.

In many ways, the privatization of the 1980s and 1990s in Malaysia was a baby step into refocusing the government.

As time progresses unfortunately, it is unclear if privatization has continued or ceased with the introduction of powerful government-linked companies in Malaysia. What were privatized long ago are now partly owned by the government indirectly, mostly as the majority or the main shareholder. This is done through Khazanah, PNB, EPF, Tabung Haji and other investment arms of the state.

GLCs notwithstanding, one of the few things that mar many privatization efforts was the creation of monopoly. Monopoly is not necessarily a bad thing but better privatization method could have been employed to encourage competition in the market. Nevertheless, the creation of monopoly through privatization could be defended by resorting to the natural monopoly argument.

Yet, healthcare does not fit the definition of natural monopoly. Competition can exist in the industry. This makes that argument irrelevant to this case.

The proposed privatization of IJN risks of the creation of a monopoly. Not just monopoly but state-induced monopoly. That has to be a double-whammy.

Casual research indicates that the increasingly conglomerate Sime Darby’s existing business does involve healthcare and it does offer services with respect to heart treatments through its Heart Centre.[2] Information provided by The Star does show that IJN and Heart Centre do compete with each other by the virtue of offering the same services.[2a] Without further research, it is unclear how extensive the competition between the two institutions or whether there are other competitors out there; I suspect there is. What is certain is that the merging of the two under Sime Darby Healthcare will undoubtedly grant Sime Darby with market power. Sime Darby, on its own, is already a formidable player in the industry.

In responding to request for comment on the matter, both Prime Minister Abdullah Badawi and his deputy, Najib Razak said that Sime Darby must ensure IJN is accessible to the poor if the deal is to go through.[3][4] How creating a commercial monopoly would do just that would require extensive debate which the PM and the DPM might find it hard to win.

If IJN is to be privatized and if the government really care about making treatments at the IJN affordable, competition is the answer, not monopoly.

There are of course other means to make the treatment affordable even with privatized IJN. Among the methods are government subsidy for those deserving of it or even the creation of a national health system which provides health insurance. I do not endorse these alternatives. By stating the alternatives, I am merely showing there are ways to make IJN private and affordable to the poor. Creating a national health insurance just to address the issues surrounding the privatization of IJN is absurd.

Those alternatives however still do not address the concern for the unnecessary creation monopoly.

In any case, with the proposal in its current form — that is, I assume, a simple acquisition of IJN by Sime Darby — I am not too warm to it. There is no concrete information to show that deal is larger than a simple transfer of ownership from the Ministry of Finance (IJN is owned by that Ministry) to the GLC Sime Darby (in turn owned by the quasi-government PNB).

If IJN is to be privatized, I would prefer for it to be sold to another entity to encourage competition in the market. There are better option out there and the one taken at the moment is not it.

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

[1] — KUALA LUMPUR: Sime Darby Bhd has expressed interest in taking over the National Heart Institute, or Institut Jantung Negara (IJN), a move that has met with objections from the ministry of health, sources said. [Sime Darby eyes IJN. Lim Shie-Lynn. The Edge Daily. December 18 2008]

[2] — A superior one-stop centre comprising a fully equipped coronary care unit (CCU), cardiac ward and cardiovascular catheterization laboratory. [Heart Centre. Sime Darby Healthcare. Accessed December 18 2008]

[2a] — Fair use. Copyrights by The Star.

Some rights reserved. By Mohd Hafiz Noor Shams

[Sime Darby seeks stake in IJN. K.C. Law. The Star. December 18 2008]

[3] — KUALA LUMPUR Dec 18 – The government will allow Sime Darby to take over the National Heart Institute (IJN) if it can guarantee that the low-income group can still afford treatment there. [PM wants Sime Darby to guarantee treatment for poor if it takes over IJN. Shannon Teoh. The Malaysian Insider. December 18 2008]

[4] — Najib, who is also the Finance Minister, said Sime Darby must pledge its commitment that the poor would not be marginalised if IJN is to be transferred to it. [Najib: No objection to Sime buying IJN stake. Shannon Teoh. Business Times. December 18 2008]