Tuesday, May 17, 2005

The Futility of Price Control

In the past 3 month I have been advocating removal of subsidies, (particularly petrol and diesel subsidy) free floating of the ringgit, deregulation of the financial markets and stopping the inflow of cheap foreign labour into the country as well as advocating for minimum wage and safety net. For the full articles, visit http://nooryahaya.blogspot.com.
Lately the government has taken the step to reduce costs associated with ballooning fuel subsidy cost – petrol and diesel price increase, which will save the government approximately RM2.2 billions. With this savings for the government, comes the pain for the masses, price increases in everything that needs transport. Lorry charges, taxi rides, bus fare as well as prices of general food and vegetables – fish, meat and chicken. The government has been trying its best into talking down the prices, the Prime Minister has been calling the traders not to increase price.
Price control defies economic logic. If a good (e.g. a kilo of sugar) cost RM1.30 to produce, how could a trader sell it for RM1.20? Well the trader has to make his/her profit somewhere else, i.e. he/she must sell something else that returns more than average profit to make up for the losses of the controlled good. In the case of our small traders and operators in essential goods (market traders, taxi drivers et al), they don’t have any other profitable products that can make up for the losses incurred. So what will they do when losses become unbearable? Gulung tikar. To me that is a gross injustice.
Losses and lower than average profit in any sector of the economy signals to the operators in that sector to cut their losses and move their capital investment elsewhere. This is what will happen to some sector of the economy which is facing government imposed price control. The telltale sign of underinvestment in any sector are evident in our bus service, taxi and agriproducts (especially vegetables, chicken and beef).
So in the near future, prices of these products will be much higher than its fair prices, because current underinvestment in these sectors creates scarcity, and with scarcity, prices increase, ceteris paribus.
Ask any average Malaysian if he/she knows any good that is under controlled price or subsidized to a certain extent. Almost every essential products; cooking oil, sugar, rice, chicken, beef to name a few, are under price control.
I can suggest a better way for the government to help low income earners, that is increase their income sufficiently to afford decent living. Social welfare payment for those who are unable to earn a living, income top up directly from the government for low income earner in the private sector would be more useful because it target directly to the intended group. Minimum wage law could also be enacted so that errant employers would not be able to exploit workers with impunity. Current system of subsidy, tariff and price control is flawed, subsidies benefit the rich more than the poor (look at petrol and diesel subsidy), tariff made prices of goods higher (and delivering fat profits to the protected industries) and price control promotes shortages and underinvestment in the affected sectors. Let’s free the market.


kmexeter said...

Open market brings economic and social adjustments that the immature Malaysian society is not ready to shoulder. The priod of correction would be devastating to our 'strong' economy. I am not sure how we can achieve this.

nooryahaya said...

you are right about adjustment. the best time to adjust is when the economy is strong, not when its weak. i would recommend adjust bit by bit. 1.do away with foreign labour first.
2. then minimum wage and safety net.
3.then...well whichever is manageable and palatable ..like consumption taxes..