Thursday, March 27, 2008

Shahrir Samad Taking Bold Steps Forward?

It is indeed refreshing to find the new Domestic Trade and Consumer Affairs Minister, Datuk Shahrir Samad taking the bold step of dismantling price control mechanism in Malaysia, particularly since it will be deemed as an unpopular move as it will be perceived as more price increases in the forthcoming months.

In an earlier report, he has even stated that he "will turn everything inside out" to make things better in the country.

It may appear counter-intuitive but untenable price controls have resulted in severe shortages of cooking oil, wheat flour and other essential goods for the past few years. In other words, the rakyat will not enjoy the benefits of price controls anyway, if the goods are not available to be purchased at those prices.

For example, despite being a price-controlled item, condensed milk cannot be found in any of our local markets for the simple reason that at the controlled price, no supplier is able to recover their cost from selling the product. Instead, what we have is an inferior product substitute - "condensed sweetened creamer", which is sold at much higher prices.

Similarly, the construction industry has responded positively to the proposed changes as it was impossible for the builders to purchase steel and cement at the "controlled" prices of RM2,419 per tonne and RM10.95 respectively. Instead, contractors are forced to purchase these goods at grey market prices which are significantly higher than even competitive market prices, rendering the price control mechanism completely counter-productive.

These articifial price controls also resulted in unrealistically low inflation rates in the country, such as 2% for the year 2007. This is because up to 60% of the products measured are "controlled" items despite them either not being available altogether, or available only at grey market prices. As a result, distortion is created in the market as wage increments of Malaysian workers are often tied to Malaysia's official inflation index, which results in shrinking real wages.

However, the Government should remove price controls by implementing two other key policy measures which will ensure that prices will not be artificially manipulated upwards and the poorer segment of the population will not be unjustly burdened.

Firstly, as price control are removed, competition between suppliers must be increased. Without competition between suppliers, it is easy for say two or three licensed producers of a certain controlled product to collude and mark up prices unfairly. Only with greater competition from local and foreign suppliers, can the people and business secure the relevant goods, whether cooking oil, flour or cement at market competitive prices.

Secondly, it is important for the Government to measure the impact of the change in prices for the poorer segments of the Malaysian community and design measures to assist them in meeting the higher cost of living. Savings from subsidies of these controlled items - flour, cooking oil, fuel etc. must be channelled directly to those from the lower to middle income group.

The DAP has proposed in our 2008 Budget that these funds be channelled directly into the workers' EPF savings, and reforms be made to the workers contribution rate to enable higher disposable incomes for the target group to meet the challenges of inflationary pressures.

We certainly look forward to more progressive policies from Datuk Shahrir Samad and we hope that constructive policy suggestions from DAP can be taken into account in the policy formulation process via the set up of parliamentary select committees for each Ministry.


The Sun has covered the above issue in today's copy of the paper ;-)
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