Tag: quota

Categories
Economics

[2756] Press on with economic reforms

I do have complaints about various government policies but I do see improvement on this front at the federal level in the past few years. Two policies I am largely in agreement with and am advocating are the subsidy cuts and in its place, the cash transfer program.

After all the progress made however, my fear is that the government is losing its focus and it is taking a step backward. I will take such reversal as a betrayal to the earlier promise of economic reforms.

I write so because the government plans to introduce a complicated quota system for subsidized petrol and diesel in place of the current blanket subsidy regime, which given the current global crude oil prices, is at the brink of elimination. The prospect of elimination is good news but now the government wants to maintain the subsidy instead. It just cannot make up its mind.

Under the new convoluted system, each person would get some quota of subsidized fuel based on his or her income in the name of targeted policy: the higher your income, the fewer quotas you would get. Any consumption above the quota would be charged at market price. Full details have not been released yet but during the tabling of the federal government’s budget, the Prime Minister said he would announce the mechanism soon.

What makes the situation worse is that the government also plans to limit the cash transfer program we all know as Bantuan Rakyat 1Malaysia (BR1M) by restricting items that can be purchased by the program’s beneficiaries. The government is supposedly concerned that the recipients would abuse the cash from the program by buying luxury goods, like an iPhone 6 that a certain Minister is using now. After all the speech about the-days-of-government-knows-best-is-over by the Prime Minister when he first took power, here, the minister Ahmad Maslan is showing the government’s paternalistic side by attempting to dictate a person’s consumption pattern right up to the minute details.

I disagree with both proposals because they are bad policy. I would prefer the government to stick with a superior pure subsidy cut-cash transfer mix instead.

Quotas and coupons are inferior policies

The only way I can think of to make such consumption control as preferred by the minister possible is by converting the cash under BR1M into some kind of coupons. I am struggling to think of any other way to make such paternalistic policy possible. Maybe that is my imagination failure, but I would think any other way would be unnecessarily more complicated than the coupon setup, which is already complicated, risking abuse.

Why? The recipients can sell the coupons at a discounted price to get cash instead of buying items meant to be bought by the coupons. And what prevents them from using that cash to buy luxury goods? As you can see, it is a complicated system that reduces the potential amount received by the targeted person through leakage and does nothing to address the minister’s paternalism, assuming his paternalism is right in the first place.

By leakage, I mean the benefits meant for specific groups get leaked to the unqualified others through the discount. The coupon purchasers who are not meant to get the coupons get to enjoy the benefits of the coupons. How about a concrete example? It has happened with the 1Malaysia Book Voucher program where students did exactly that: they sold their vouchers at a discount for cash to a third party.

The same argument is also applicable to the quota system for subsidized fuel. What prevents a quota holder for selling his or her fuel to others at some price higher than the subsidized price but lower than market price? There is nothing ”targeted” about it.

Monitoring might be the key to the success of such system but with the government trying to balance its budget, does it make sense to create a whole new bureaucracy to police the effectiveness of the complicated regime?

Furthermore, the coupon system would require distributors. Just who will distribute the coupons, one might ask? The government would likely outsource it to someone else in private sector given that there are millions of households already benefiting from the cash transfer program BR1M. And with all the complicated supply chain of vouchers, who knows what would happen. Something can go wrong. Why creates an opportunity for corruption in the first place?

If  you want a clean targeted policy, then you would only need to wire in the necessary cash directly into the recipient’s account. It is precise, easy and clean. If the person has no account, establish one for him or her. This way, no third party gets to handle the cash, leaving little room for abuse. And we already have that system in place. Why change things that work?

A regression of policy

Subsidy cut and cash transfer work charmingly and that is enough. The proposed quota-coupon policy will instead undo the successes of the subsidy cut-cash transfer policy by complicating everything.

If indeed the quota-coupon policy mix will be implemented, then I would see it as a regression. It is a policy U-turn. The maintenance of the subsidy system will preserve the very inefficient system that the government wanted to get rid in the first place while the introduction of a coupon system introduces other kinds of new inefficiency.

We are already on the path to a superior policy mix compared to the one we had before. I would go further by arguing that the logical end of the current mix is the best one given the objectives of creating a more efficient market, lowering the fiscal deficit and at least preserving — it can even be enhancing — the welfare of Malaysian most affected by the cuts and elimination of subsidies.

Remember the cash transfer rationale

It must be remembered that both subsidy cuts and cash transfer should be seen side by side. They are not independent of each other. The cash transfer is meant to address the negative impacts of subsidy cuts, making the cuts more palatable to the low-income households. The cuts meanwhile finance the cash transfer.

If the government reduces the efficacy of the cash transfer by taking the cash element away, then whatever remains of it will be unable to play its role as a cushion at its greatest potential for the financially weakest households. At the same time, if the subsidy is being maintained, then we should not increase the cash transfer. I would even say that the maintenance of subsidies calls into question the existence of the cash transfer program in the first place.

The Prime Minister during the budget suggested that the revenue raised from the goods and services tax will finance BR1M in 2015. That is a really a dangerous statement that upends the ties between the subsidy cuts and the cash transfer. Maybe this is a sign that the government is getting itself confused about the rationale for the cash transfer, which can explain why we are starting to see economic reforms losing steam as various inferior policies proposed at the expense of superior ones.

Don’t fix it if it ain’t broken

My advice to the government is to press on with its earlier promised economic reforms. Ditch the inferior quota-coupon mix. Maintain the current policy. Press on by floating all fuel prices. We can move on to LPG subsidies once the business with petrol and diesel is done. Maintain and improve the cash transfer program. Do not change the cash nature of the program. Increase it whenever subsidy cuts save more.

Just no to quota. No to coupon. And no to Ahmad Maslan’s paternalism.

The government has all the political capital it needs to press on with the reforms. The general election is still so far away. All the political criticism against BR1M can easily be dismissed. And BR1M is a cheaper and better kind of populism backed by good economics compared to the old subsidies and all those complicated policies. What is not to like?

It would be a great shame if by 2017-2018, all the political capital the government has now is wasted on half-measures.

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 Malay Mail on October 21 2014.

Categories
Economics

[2368] Subsidy is not the only thing

Subsidy reduction will allow market forces to allocate resources more efficiently. Prime Minister Najib Razak was reported saying so recently to justify his administration’s commitment to subsidy reduction in the long run. By doing so, the Najib administration claims to be an advocate of free market. A claim that is not necessarily true, however. At best, that claim reveals a selective belief in the free market.

The truth is that market forces are restricted not only through price mechanism. The restriction also comes in form of quantity control, among others. This is especially relevant in Malaysia where the government has introduced various regulations and institutions to control the price and supply of various items. Among those items are flour, diesel and sugar.

In fact, the government has wide discretionary power over this matter. Proof: the new Price Control and Anti-Profiteering Act grants the government the power to fix the price of any goods and services in the country. Yes, that is any goods and services. The net has been cast widely.

Despite the various channels where market forces are prevented from distributing resources efficiently, for some reason the price mechanism is receiving all the attention while the quantity side remains relatively untouched. As an example, look no further than the domestic sugar industry.

The government recently reduced sugar subsidy and effectively raised the retail price of sugar. All the liberal benefits of reduction have been thrown out in the open: fiscal deficit reduction, efficient resource allocation, investment over consumption, etc. You just need to name it.

At the same time and less discussed is the existence of the illiberal import quota system. The government through a quota system controls the importation of sugar. The government also grants the quotas only to several refineries ultimately owned by Felda and Tradewinds, which themselves are closely connected with each other.

It is not an understatement that the two companies control the sugar industry with a clear government sanction. As a side note, it will be interesting to see how the two companies will be subjected — if ever — to the new Competition Act, which has a highly questionable purpose.

If the government gets one point for liberalization due to subsidy reduction, then the government must lose a point from the import quota policy. Given how the import quota policy has created two related monopolistic companies — one being the favored entrepreneur of the government of the day and the other being a government-linked company — and that prices are controlled, the government must lose more than a point.

However one wants to keep the score, the inevitable conclusion is that this liberalization done through subsidy reduction is merely a half-hearted liberalization.

Whatever market forces are mentioned to justify the reduction in subsidy, it is stated insincerely. The liberal argument is just something convenient that the administration grabbed out of the air just because it fits its agenda of day. When one does not derive an argument from the first principle, one cannot expect anything less than inconsistency; the Gods of Inconsistency are staring straight into the eyes of the Najib administration.

The government can prove its credential as an honest advocate by deriving its policy from the first principle. That is, the whole industry must be liberalized. The removal of subsidy and price control must happen together with the loosening of the import quota system.

This goes not just for the sugar industry, but also for the relevant others.

It is only then that the prime minister can state that subsidy reduction will enable market forces to allocate resources more efficiently with a clear conscience.

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 23 2011.

Categories
Economics Fiction

[2226] Of the road to hell…

It begins with a good intention. Everybody deserves to consume fantastical juice. After all, everything is made out of it. It would be a grave injustice to limit its consumption only to those who can afford it.

Invested with executive power, a group of individuals with only the interest of the public at heart intends to make the fantastical juice available to everyone. They — the do-gooders —decide to introduce a policy to subsidize the production of the fantastical juice.

What follows is a production boom that lowers the prices of the fantastical juice to affordable levels. In fact, the fantastical juice sold here is the cheapest in the region.

On the breakfast, lunch, brunch, tea, dinner and supper menus, the fantastical juice is a star. Consumers are happy. The policy becomes popular. The do-gooders are popular.

All is fine and dandy until one little problem pops up: scarcity. They realize the subsidy policy demands a whole lot of resources. The policy is depriving resources from other programs. They begin to realize that good intention is expensive.

It is all the more expensive when the producers are guaranteed payment through the subsidy scheme. Producers of the fantastical juice just keep on producing even when there is no need for more fantastical juice. After all, who does not want free money?

The do-gooders complain, ”Oh those pesky producers. How dare they take advantage of this noble effort to make the fantastical juice available everywhere to everybody at affordable prices? Never trust them. They are only in it for themselves. They leave us no option. We must regulate them.”

And so, the do-gooders decide to have producers of the fantastical juice licensed. Quota is imposed on production.

The producers protest but not too hard. After all, the policymakers still pay them money. ”At least, we are still making profits.” Without the government and the subsidy program, they would have been left at the mercy of the market. ”We might make a loss if there was no subsidy!” They figure, better work with the government than be at the mercy of the greedy consumers.

That stops the cost of the policy from ballooning further. It solves one problem but it creates another: the fantastical juice mysteriously begins to disappear from shelves of grocery stores.

Consumers are infuriated. Consumers demand action.

The do-gooders panic. They need a scapegoat fast. No, they do not need a scapegoat. One cannot make scapegoats out of smugglers. It must be those greedy smugglers abusing a system designed to benefit all. ”We will double officers at the borders and we will triple the penalty.”

They catch those smugglers but fantastical juice still disappears into thin air. At some point, they realize that they cannot continue to blame the smugglers. If they still do so even after greater enforcement, they would send out a message of failure that there is something wrong with the good policy, and that it is not the smugglers after all. That would undo all good work they have done. Support for their policy would plummet with the slightest hint of admittance of failure.

”We need to identify the problem,” demand the do-gooders.

They conduct a thorough study of the supply chain of the fantastical juice and they find it. It is the retailers. ”These retailers are hoarding the fantastical juice and profiteering from our noble effort. They leave us with no choice. We must regulate them.”

And so, the do-gooders decide that only retailers with the special license can sell the fantastical juice. The do-gooders also introduce price control and ensure that there is a fat margin for retailers. This will encourage the retailers to be more honest because if they are caught, they will lose their license and, because of high demand for the fantastical juice, they will lose a guaranteed profit. The elimination of price variation eliminates the opportunity for retailers to indulge in profiteering as well.

The retailers register a protest, claiming that it is not their fault. ”Supply, being inflexible, is unable to match demand. We do not hoard it. We cannot sell what does not exist.”

”Oh, if that is the case, then you are not managing your inventory efficiently enough for the good of the people. There is enough production for the whole country. We will manage the supply for you.”

Just to keep it airtight, only government-owned transporters are allowed to deliver the fantastical juice in the country.

The do-gooders marvel at their new master plan for the fantastical juice. Their proudest achievement is this: the cheapest fantastical juice in the region is still here.

Alas, shortage persists. ”Someone must still be profiteering from this noble effort,” cry the do-gooders.

Being at their wit’s ends, the do-gooders approach several consultants. These consultants point out that the consumers are consuming too much of fantastical juice. ”That is why there is shortage. They are over demanding it.”

The do-gooders are angry. ”Those no good consumers! They are abusing the system! We want to help everybody, but everybody is abusing our trust! We must regulate them!”

And so, consumption quota is imposed on every consumer. With control at every point, the do-gooders match demand and supply to solve the problem of shortage.

At least, theoretically because those with low demand get too much quota and those with high demand get too little quota. To solve the problem, consumers participate in the black market. Consequently, crime associated with the black market flourishes as cartels are formed to profit from the unlicensed and hence, illegal trade.

”Criminals! All of them are criminals!” shout the do-gooders, ”Send in the police.”

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 July 18 2010.

Categories
Economics

[2136] Of import quota policy is irrelevant to the objective of low stable prices

On December 7 in the Parliament, based on the Hansard, Deputy Minister for International Trade and Industry Jacob Dungau Sagan was asked whether the government intends to abolish a policy that grants exclusive permits for imports to limited entities and effectively, the granting of monopoly power to several companies over certain commodities such as sugar and rice. He effectively said no and went on to defend the policy.[1] I find the defense problematic.

He began his defense of the policy by stating it is the responsibility of the government to ensure that prices of such commodities, and specifically sugar, remain at affordable levels while promoting the sugar industry in Malaysia. According to him further, due to the fact that prices in Malaysia are lower than prices in neighboring countries, there is possibility that producers will not import sugar when prices in the international market are higher than local ones.

Approved permit policy however is an very suboptimal solution to the problem. His answer is similarly so.

Firstly, prices are lower because of price control. Remove the control and prices will go higher. If the local prices without price control mechanism is higher than international prices, then there will be no problem of flow. In fact, the approved permit restricts flow into the local market. If it is the other case, then while there might be problem with flow, the policy of approved permits does not address the problem. This brings us to the second issue I want to raise.

Second, import quota is useless when international prices are higher than local prices sans free trade. It is a redundant policy. Why is it redundant? The rationale is the same as having a minimum wage that is lower than all other wages paid by the market. Higher international prices compared to local price however does introduce the issue of flow. There is a way to address that concern and this is why I make the third point.

Third, the existing subsidy system alone is more than capable of ensuring that there is no large major outflow of sugar under the price control mechanism. How? Just pay (really, subsidize) the importers to bring in the sugar.

I wish to veer off course for a moment or two here. Do note that this does not mean that I support a subsidy system. Rather, it is only a demonstration of positive economics. It is not an exercise at proposing the best policy but merely an effort at proposing a better policy. The best policy remains one that returns to the principle of free market.

Returning to the issue at hand, another unsatisfying point the Deputy Minister made in defending approved permits policy for sugar involves price fluctuation. Again, the subsidy system already in place is able to confront that. There is an existing system in place: the previously used fuel subsidy regime.

Really, the import quota policy is redundant in addressing fluctuating prices. Quota itself does not lessen fluctuation of prices. Any considerable fluctuation in the international price of sugar will translate into fluctuation of local prices regardless of permits, unless a country is a complete natural autarky, which Malaysia is not. What it does is merely to increase average local unsubsidized prices. It does not decrease variance around the local average. In other words, quota just makes prices fluctuating at the same magnitude at higher levels.

The relevant policy should be only price control and subsidy to producers and importers. Two tools alone are sufficient to achieve both objectives of affordable and low prices.

I want to harp on this point again, just in case if it had not driven the point home. While it is important to understand that these two policies suffer grave weaknesses — two examples are smuggling and shortage; also opportunity cost — when juxtaposed alongside free market environment, import quota in no way addresses those weaknesses. Therefore, import quota is really an irrelevant policy, if the objective is low stable prices.

The real reason for import quota is to protect domestic producers. The Deputy Minister did mention this as a reason and he should mention only this as the reason without stating that the policy is there to ensure that prices are affordable and to ensure the availability of sugar. The import quota raises price of sugar, with or without subsidy, much to the benefit of importers and producers of sugar.

It is worth highlighting that there are only four sugar factories in Malaysia owned only two entities. These entities also monopolize the quota. Never mind that these two entities are closely linked.

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

[1] — See page 18 the Hansard dated December 7 2009.

Categories
Society

[2030] Of Gender-based quota is counter-productive

We live in a world full of inequality in terms of rights and opportunities. For those who care, it is only natural for them to address it and one of the tools available to correct the inequality is affirmative action. While the tool can be useful at creating an egalitarian society, it is imperative for us to note that certain injustices do arise as a response to previous inequality or injustice. This needs to be avoided.

Two wrongs make a right: this is one of the dangers of race-based affirmative action in Malaysia. It is also one of the dangers of setting aside a 30 per cent quota for women participation at all levels of decision-making in the government. An attempt to introduce such quotas as part of gender-based affirmative action is a policy of reverse discrimination, and hence an unjust policy.

The biggest issue about setting aside quotas for any particular group is about meritocracy. Specifically, it revolves around the availability of qualified talent within that group. The question is all the more relevant in critical areas like decision-making where competency in a particular subject is a requirement in designing good public policy. For us to move forward, we need the best individuals to articulate our public policy. Any intention to take into account factors that may deprive the government from the best talent should only be considered after thorough thinking.

If the quota is set in place, and if there are not enough qualified women to fill the quota, then those who are responsible for achieving the quota will fill the designated space with token candidates. This will be a recipe for disastrous decision-making and public policy. Or at the very least, these token candidate will not be able contribute to the kind of discussions required to form good public policy and decisions.
The quota also prevents the best, regardless of gender, from taking their rightful place. This is an act of injustice to those who are more than qualified to occupy a decision-making position but are denied that position because they belong to the wrong gender.

The formulation of good policies is in the interest of all residents of Malaysia, especially citizens. It is for this reason that the 30 per cent participation quota in decision-making for women is not exclusively a women matter. We live in an interdependent world. Decision-making in the government can affect each and every one of us. This is especially so if blunt policies are preferred to precise ones since precise policies and decision-making require highly knowledgeable policymakers.

This is not to say that women are not capable. Far from it, enough women have proven their credentials to make the reverse true. Rather, these competencies are likely gender neutral. It is this neutrality that allows capable women — or simply, capable persons — to prove themselves in the free market without prejudice. Any capable person can compete fairly in a merit-based system and need not rely on special provisions, as usually provided by affirmative action, to rise through the ranks.

Institution of an affirmative action that is based on a kind of equality of outcome may open capable women to unfair generalisation. Just as successful Malays are susceptible to the accusation that they are successful mostly due to affirmative action instead of effort, the introduction of a 30 per cent quota for women participation at all levels of decision-making will do the same thing to capable women.

There are better ways to address inequality and downright discrimination that exists across gender. It involves a shift of focus from equality of outcome to equality of opportunities. By equality of opportunities, in this context, it means no discrimination based on gender. In fact, a society that embraces the concept of equality of rights that is a mere extension to the idea of individual liberty must eliminate such discrimination.

Along with equality of opportunities, what is more useful in addressing low representation of women in decision-making levels is the empowerment of women. This calls for awareness of opportunities that exist as well as, perhaps more importantly, access to education. Building capability or any other effort at organic improvement is more meaningful and more sustainable than achieving some sort of equality dictated from the top.

Once equality of opportunities and empowerment of women are truly done, then there is no reason why women participation in decision-making should be at only 30 per cent, given that women make up roughly half of the Malaysian population. The organic solutions will improve the participation rate without resorting to unjust reverse discrimination. It will also ensure those participating in various decision-making levels truly belong there, regardless of gender.

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 July 9 2009.