Monday, January 21, 2008

Cooking Up A Storm

My article on the cooking oil fiasco appeared in Malaysiakini column last Tuesday. I'll reproduce it here below ;-)

On 7th January, the Government imposed the shocking move of having to ration the purchase of cooking oil by Malaysian to 10kg each, to temporarily resolve its shortage. It certainly wasn't the first time that this drastic action has to be put in place. In 2006, the supply of sugar faced the same problem. Now, there's talk of potential shortage in wheat flour.

What is of note, is that there is no shortage of global supply of cooking oil, flour or sugar during this period of time. Why is it then that the Malaysian micro-economy appear to be failing so miserably?

From an economic perspective, the answer is simple. The Government's seemingly iron-clad price control mechanisms for basic essentials emulates those put in place by the failed command economies of the new defunct Soviet Union and Eastern Europe. Yes, believe it or not, it appears that Malaysia is a market economy practising impractical communist policies.

In the 1980s it is commonplace to find Russians queueing up in front of stores to purchase basic good such as bread and butter. In fact, I learnt to drink coffee with honey in Moscow as the restaurant could not secure supplies of sugar back in 1989, prior to the fall of the Berlin Wall.

The communist Soviet Union attempted to control the prices of all goods and services, the quantity of supplies as well as who produces these goods, independently of the global economic environment as well as the market demand and supply forces. It was certainly no joke when you hear of stories of factories producing only left sided shoes, without its matching right counterpart. As complacency, corruption, incompetence and downright obstinance sets in, the Soviet Union economy imploded, precipitating the rise of populist Boris Yeltsin and ultimately, the dissolution of Soviet Union.

Why would such command economy policies fail so spectacularly, when purportedly, they were meant to increase fairness, equality and equity amongst its population? Similarly, why did Malaysia's price and supply control measures meant to benefit the poor fall apart like the house of cards?

Very simply, the Governments attempt at all cost to give the false public perception, particularly before the impending general elections, of the impressively low inflation rate of 2% via policies which are out-of-sync with global realities are the real cause of shortages of essential goods.

Just as in the Soviet Union where there wasn't any profit incentive for businesses to thrive, local licensed and controlled producers have little incentives to manufacture and supply these price-controlled goods. This is because there is little or no profits to be made despite government subsidy given the record-breaking commodity prices in the past year. For example, wheat flour prices have increased by 70% in the international markets.

It is hence unsurprising that these manufacturers and suppliers choose to focus on other related products which don't face any price controls, such as premium flours or fine sugar. For example, non-general-purpose flour are sold between RM2.60 and RM2.90 per kilo while general-purpose flour is RM1.35 per kilo.

What makes the situation even worse in Malaysia's case is the heavily regulated licensing requirements for the production of these essential goods whereby competition is limited. For example, as the nation faced various supply shortages, the Government refuses to increase the number of permits to import wheat flour despite the call by Federation of Malaysian Consumer Association (Fomca) president Datuk N. Marimuthu for the Government to do so in order to curb price increases.

Such price-control policies which are substantially divergent from global realities will also result in a negative externality, that is the creation of a “grey market”. Due to shortages in supply in the Soviet Union, the “grey market” thrived with great incentives for traders to sell these goods at higher prices to willing buyers due to heavy pent up demand. This will in turn create a vicious cycle which exacerbates the shortage faced in the supply of these goods via the normal markets.

Similarly, in Malaysia, consumers are now facing significantly higher grey market prices. The Star reported on 7th January that a hawker complained that “lately, I have had to make more visits to sundry shops for my cooking oil supply. Some shops are taking advantage of the shortage and selling the oil at RM14.40 per bottle, which is 90 sen higher than the normal price.”

As for flour, it was complained that “wholesalers are charging between RM5 and RM15 more than the price-controlled rate of RM33.60 for the 25kg bag of flour.”

Of course the fact that our basic essentials are priced articifically low, the incentives for smuggling and foreign purchases becomes extremely high for traders to profit from the arbitrage in pricing between Malaysia and its neighbours, Singapore, Thailand and Indonesia.

The Government consistently blamed panic buying as a result of rumours of price hikes the cause of a shortage in cooking oil and flour. Unfortunately such panic buying and hoarding of goods is not the cause of the shortages but instead are the direct symtoms of an ineffective and distortionary price-control policy.

Hence when Domestic Trade and Consumer Affairs Minister, Datuk Shafie Apbal confirmed that these shortages were “artificial”, the irony is that he is indeed correct because these shortages were indeed artificially created by poorly-formulated, politically motivated Government price control policies.

Before readers complain that I have only provided criticisms and not constructive proposals to assist those most affected by inflationary pressures, we have in the DAP's Budget 2008 for Malaysia proposed various more effective measures to assist those most in need.

In the short term, the prices of essential goods will have to be more aligned to global prices to avert such unnecessary and embarrassing episodes of shortages. The savings in subsidies should instead be channelled directly towards the middle and lower income earners to help them cope with the price increases. Under the current distortionary subsidy mechanism, the wealthier segments of the population are able to benefit proportionately more as they have greater access to these goods either via the grey market or more funds to hoard goods, which in turn exacerbate these shortages.

We have consistently proposed that those gainfully employed with income lower than RM3,000 per month be granted a Malaysia bonus of up to RM3,000 to cope with these challenges. Such a measure will have the additional benefit of reduced leakages which results in unbudgeted increased government subsidies arising from smuggling and the grey market.

Over the longer term, it is critical for the government to raise the productivity levels of the Malaysian labour force which has not increased substantially over the past decade. The only way to beat global inflation is not to keep prices artificially and unsustainably low, but to increase income by a rate significantly higher than the real price inflation.

While the growth rate in Malaysia's economy remains “healthy” at 5-6% levels, it masks the fact that growth is driven strongly by the oil and gas, as well as the commodities sector via record global prices and not due to increased worker productivity, human capital and efficiency. Without the latter, which can be achieved via a real, as opposed to a rhetorical transformation into a knowledge economy, middle and lower income Malaysians, particularly those in the urban areas will continue to face hardship in their economic circumstances.

11 comments:

Anonymous said...

one of the goverment stupid ideal;)

Anonymous said...

Do we want a social worker like Chew Mei Fun to be our MP in PJ??

Do we want to continue to be treated as 2nd class citizens by UMNO-BN?

Do we want an increasing crime rate and a muted police force?

Do we want our nation's wealth continued to be plundered by UMNO-BN?

Do we want a corrupt and evil regime to govern us?

DO we want a bunch of eunuchs in MCA to continue to feed us lies and half truths??

Do we want to our children to suffer because we dont have the balls to make that change?

If the answer is a NO, then lets vote for change!!

And lets start with PJ by voting for Tony Pua!!!

Anonymous said...

our great dreamer, PM will be chairing the Price Fixing Council according to MInister of Domestic Trade. Another way to create more artifical shortages and enrich smugglers. BN BOLEH!

rational thinker said...

Tony,

while you are making correct observations with regards to the stupendous "state-controlled" economics regime we have, you should also advised your boss, Lim-jr on the danger of making economically-unviable proposals such as those reported today on:

http://www.sun2surf.com/article.cfm?id=20555

To quote: ""DAP suggests that those earning less than RM3,000 a month be given an annual grant of RM3,000 and families with a combined income of RM6,000 a month be given RM6,000 annually." Such mechanisms are just as Poor as giving unemployment benefits. Have DAP thoughts of the cost of its various proposal? while the idea of transferring fuel subsidies to low/middle income is excellent, so far, we have yet to hear a good plan from DAP yet.

no more rhetoric, more concrete action plan? and we have yet to hear much about the DAP budget plan too.

Anonymous said...

giving free money is a stupid policy, given a choice, I would prefer to secure a job that pays me RM2999 per month, thus allowing me to claim an additional RM3000. making my net profit for the month RM5999 instead of RM3000

Anonymous said...

Tony Pua,

MP for PJ Utara, go for it man!!!

We want a MP who will voice and fight for our rights in Parliament.

Tony P said...

Hi rational thinker,

Thanks for your comments.

Just to highlight a few points on my boss' proposal:

1. The underlying assumption is that there is an urgent need to help the middle and lower strata of the society, and it is part of the government's responsibility. So, for those who don't believe in any welfare assistance to be provided by the Government, then the following arguments wouldn't apply.

2. What we have proposed is a more efficient and better managed system of assisting this group of people instead of the current subsidy mechanism, which more often than not benefits the wealthier segments of society. It doesn't cost any more than the existing mechanisms. What's more, Singapore has been doing the same for the past 4 years.

3. It is certainly not rhetoric as we have proposed the above in detail in our 2008 budget which I hope you have managed to download earlier when it was released. I'll repost the link again soon. Read up on the chapter on fair wage.

It is not possible for us to explain the entire mechanism via a press conference as obviously we won't be accorded the necessary space (or time). hence the gist of it has been announced. You can check out a review of it by John Le e here.

Best regards,

Tony

Anonymous said...

Hi Tony,

Do you agree with the NEP which entitle Bumi for

1)5% to 10% discounts in buying property
2)2 times opportunity in share allotment for shares listing on Bursa.

even their household income more that RM10,000 per month?

Anonymous said...

Interfering with market forces is a very dangerous proposition. Zimbabwe most recently saw its economy collapse and went into hyperinflation.

The danger in our situation is prices of nearly everything is just waiting to burst open once the full force of open mkt comes into action i.e. full force of petrol pump prices assuming global oil prices stay around US$90+...

How is the Govt going to control and continue subsidies without ability to control supply and open global mkt? On one hand we want an open mkt economy but on the other, we wish to control prices.

Nationalising everything seems the only way but we all can predict the dire consequences!

Giving $ to the poor may also result in sellers raising prices as they want share of $, just like whenever civil servants get their raise.

My alternative, free up all artificial barriers to market forces, e.g. taxi permits, bus permits, petrol pump permits, tolls concessions, IPP concessions, broadband licences, real open tenders, eliminate all forms of APs etc. Allow free distribution of wealth is key, we got lots of money but poorly distributed.

Eliminate all inefficient suppliers and let mkt forces prevail.

Anonymous said...

There is a larger danger here that you are not pointing out. That of low interest rates. By keeping inflation artificially low, the effect is that interest rate is still real given the low interest rates.

If inflation was allowed to rise, we will see a negative real interest rate environment. What does all this means is that the current consumer driven economy is a bubble sustained only because inflation is kept low and dollar is falling. That is why I would not buy Malaysian stock now. If they have to lift subsidies and Bank Negara have to lift interest rates, the market will crash and we would be in a recession.

Yes chances are Bank Negara will not jack up too much on the interest rates but something Bank Negara cannot control is wage pressures. If the govt really start shipping foreign workers home AND lift subsidies, I don't think wage pressures can be held down.

So enjoy the market now, its heading down for sure..

Anonymous said...

Your blog has just made me want to exercise my virgin vote to DAP even more.