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 ;-)


Anonymous said...

Certainly, Shahrir Samad will have his hands full. He needs all the resources and help he could get. DAP should gather its economic brains together and draw up some proposals to help Shahrir in his policy formulations for price controls. What about it?

It would also be a good exercise for the government-in-waiting. It will give you guys practice while waiting to be the government.

Anonymous said...

Shahrir has always been seen as a maverick politician, willing to buck the trend and speak his mind.

Anonymous said...

When is the wages for middle-class rakyat going up to complement the price increase?

For the rakyat sake, a structure for a higher disposable income must be in place first before any plans of a price increase in goods are mooted.

Anonymous said...

Dear YB

To me, just another used-old-broom trying hard to be new-broom.

Actions will always speak louder than words. No action will echo that.

Eh, where is the Oxfordian accent lah?

Anonymous said...

Someday you have to explain to me how you think subsidies to the poor can work. They inevitably also become disincentives to perform OR an addiction to many.

But you are correct mechanically that to lessen the impact of price increase of basic goods, just giving money back to the working poor is the most viable option.

Anonymous said...


Some of the price control has been given significant financial benefits to certain people. One of the most luxurious one is STEEL.

I am sure these certain people are busy "sorting out" the new Minister(s).

You think Sharir has the will to do it?

YB, you just need to make few calls to certain construction industry tai kor, you know who the culprits are.

ong said...

Can we refer & study experience from others well organize country how they do the price controls problem or only Malaysia practice this.
Our Cabinet spend so much money sent some guy oversea to do research, I think they come back with sweet memories, not result.

NEO said...

Wah! How can? Only price going up?
How about average income?
How about GDP & FDI?
Will our new Finance minister doing the right job?

I hope he will not only continue with "old school" policy by awarding more construction project to contractor class F to class G as the multiple effect will not help our country economic growth.

Anonymous said...

read an introductory economics textbook

subsidies always cost more to implement than just giving the money spent on them directly to the ppl

price controls lead to a rampant black economy, in the u.s.s.r queues for basic essential items stretched to hundreds of metres

the government must be prepared to make unpopular decisions for the long term good of the rakyat. abolishing fuel subsidies would be a good start

Anonymous said...

Hi YB Tony,
I'm agree Shahrir taking bold step of dismantling price control mechanism. But just removing it with any other action to help the poor I will totally against it.

A few stop gaps measure government should be implements such,
1) Increase the minimum salary such that the potential increase of price of good can be complement by increase of minimum salary.

2) Allow foreign supplier to enter Malaysia market and compete with local supplier especially those from ours neighbor country.

3) Continue improve ours currency exchange rate, if ours exchange rate is stronger we can import more good using same amount cash.

4) Zero tax for those daily consume item.
If this action taken by government, we definitely able to help the poor and ensure healthy market competition.

Strong DAP supporter

Anonymous said...

It is very simple solution .
Rebate or subsidy can be effective as long as you are registered TAX Payer. Govt can provide TAX coupon to TAX PAYERs one the basis of family consumption. Surely if business entity who pay taxes also entitle the rebate coupon. Pensioner also will be given copon. This will ensure all rebate are given back to tax payers. Thus we can eliminate smuggling and abuses.
Foreign workers and non-tax payer must therefore registered and pay taxes to enjoy the rebate coupon. such that all the subsidy ends up to people who actually pay taxes.
A goreng pisang sellers can earn good profit, but if he never pay any taxes and he could the entity that use up subsided cooking oil that could be 10 times the normal family use, then it is unfair. surely goreng pisang price may go up due to increase oil price, but this is the changes the society must accept. conserve and efficient , and change .

clk said...

The other side of the coin which must be removed together with price control is "rent-seeking" licence, which is basically to allow cronies to enrich themselves. These include POSSIBLY the following:

a) Taxi permits
b) Approved permits for various items e.g. automobiles etc.
c) Bus permits
d) Unfairly "negotiated" lopsided privatisation contracts
e) Restrictions over licences to those who meet all the technical requirments e.g. foreign workers recruitment licence, car inspection, cable TVs, internet providers etc.

And possibly many more.

Remove them and allow free access; so rakyat can enjoy lower tariffs on the above, whilst price increase on others when price restriction is removed.

Dr Boulevard said...

FOMCA dont suggest anything?

Winston Smith said...

I believe some of the price control has been render pointless for many years. e.g.

Everyone knows that Bernas is the sole custodian of rice concession in the country. However, price control is only valid for unadulterated rice, meaning those that are not mixed with imported rice. If you look at supermarket shelves, these type of rice aren't very common. There are other form of structure inefficiency in this particular type of arrangement as well, the best rice in the market tend to be from Selangor rather than Kedah not because of soil conditions rather many of the earlier program to encourage farmers to plant rice that are resistance against insect, require little attention to take care of, tend to produce low quality rice, and poor yield. As a result these rice are often mixed with imported rice of other origins. Not to mention fertilizer subsidies are often sold off to commercial plantation or fertilizer vendors, which are sold off in the open market and even being exported.

The price control for this item is completely unrealistic at all. With increases in prices of feed and transportation, chicken processing plant typically cannot make money with the kind of price control in place. This price control however only apply to whole chicken rather than sausages or part of a chicken, now you know why whole chicken are sometimes rare in the supermarket.

Cooking oil
We export cooking oil and we also subsidies cooking oil. The difference between price subsidies level for cooking oil for domestic consumption and export cooking oil can differ by as large as RM800 per ton. It doesn't take a genius to figure out one can go to all supermarket to buy all the cooking oil and hire 2 foreign workers to pour them into a larger container for export. The subsidies money ultimately come from taxpayer.

If govt really wants to help the people, get rid of proton and lower tax rate for cars. We are paying way too much for transportation. While they are at it, fix the bloody taxi licensing system. It make life for taxi driver difficult and consumer ultimately pay for it. Also, fix the LRT, KTM and bus system. I would love to take a bus or train to town whenever I can, but these usually ended up to be a 1-2 hour trip, which I could have use it to drive to Ipoh in my car. I really wonder if govt statistic really consider transportation and lost of time in their caculation for basket of goods.

Anonymous said...

As long as human exists, free market is still the best form of economy in the world. I would even suggest to let the price of petrol to float freely. I can see a lot of good effects coming out of it.