Saturday, March 04, 2006

It took over a year..

Over a year ago I wrote this to, it was published in the Dina Zaman's section.
Title: Malaysia; a car driven economy.
The plane landed at Changi Airport just after 9pm. I changed some money into Sing dollar, just enough for the taxi ride across the causeway to JB. It wasn’t that expensive from the airport to Eunos, where the causeway bus and taxi stand was, but it was already late, just after 10pm and no bus to JB. So I took a taxi to catch up with the midnight bus from JB to KL. It was Sing $40 for the taxi ride from Eunos to the (what its name) bus stand a few miles outside JB. My first impression is that it’s beyond reason to build a bus stand miles outside the city centre, unless it is connected to the city centre with a commuter train or shuttle bus service. From JB to KL only took me 4½ hours and RM15 by bus.
KL in the early hours was a jumble of unfinished highways and viaducts. It gets worse as the day progresses – bumper to bumper traffic jam and honking irate drivers from morning till night. Obviously the new highways and viaducts are to cope with the numbers of cars on the road. It becomes obvious later that the Malaysian economy is driven by cars – fuelled by subsidised cheap petrol and no-deposit 7 to 9-year financing. Car ownership is at all time high, so great is the nation’s love affair with car that the other alternative – public transport, is stifled and fighting for survival. The evidence is all over the country – Intrakota and Park May, bus companies have been bleeding losses for a number of years and on the verge of bankruptcy. A few month ago, a finance company seized Intrakota’s buses for non-payment of loans.
Bus companies in this country has always been controlled and kept at a low rate. Bus companies have been subsidizing the commuters on behalf of the government for aeons. Just look around the city and countryside. Buses in the city are at least 10 years old; the situation gets worse in the countryside, where 20 year old buses are common. In financial terms, money is not being ploughed back into the business to replace depreciated capital, debt servicing and dividend payment to shareholders take precedence.
The number of cars on the road fuel economic growth in several areas from highway building to component manufacturing and car servicing. Every six month Malaysian Car Industry Association would release the latest car sales figures. The number of cars sold reflects the state of economy for the past six month. Financing car is cheap and does not make sense; you can buy a small compact hatch for no-deposit and monthly repayment of RM300 or less stretched over 7 to 9 years, using the car as collateral. So in a few years time, the value of the car is worth much less than what you owe the finance company. If you are smart enough to ditch the car (give it back to the finance company, after all the ownership paper says it is still theirs), the finance company would face losses.
Left to its own devices, this car driven economy could present problem in the future. Fuel subsidy cost is gobbling significant amount of cash, RM4.9 billions at the last press statement by Datuk Mustapha Mohamed. That RM4.9 billions in fuel subsidy could go a long way to pay for the country’s development expenditure, instead of subsidizing rich, middle class, 3-4 car family. Well intentioned but missed the target by a wide margin.
Worse, some of the subsidy goes to Singaporeans who crossed the Causeway every chance they get to fill up their tanks. How we love to poke at Singaporeans, yet we subsidize them with cheap fuel, rice, sugar, chicken etc.
More Malaysians thought that car is a form of investment which holds its value, when in reality it diminishes its value with time (depreciate). Traffic congestion in the cities started to waste everyone’s time, a major stumbling block to increase productivity. In fact it probably started to reduce productivity and increasing the cost of doing business.
How I would handle it differently?
Remove fuel subsidy to start with, then use some of the savings to subsidize public transport companies and individuals – train, bus, and taxi on passenger-mile basis, e.g. one passenger for 1 km RM1 subsidy, so short distance travel by public transport could be free. This will simultaneously reduce congestion in the city, (higher fuel cost is a disincentive to drive to work) and improving public transport by attracting more investments.

Then I wrote this:
The futility of price controls
Noor Yahaya Hamzah
Jun 29, 05 1:01pm

I have always advocated the removal of subsidies (particularly petrol and diesel subsidies), the free floating of the ringgit, the deregulation of the financial markets and stopping the inflow of cheap foreign labour into the country as well as advocating for minimum wage and a safety net.

Lately, the government has taken the step to reduce costs associated with ballooning fuel subsidies cost with petrol and diesel price increases which will save the government approximately RM2.2 billion.

But with this savings for the government comes pain for the masses in the form of price increases in everything that needs transport. Lorry charges, taxi and bus fares as well as prices of food and vegetables will climb.

The government has been trying its best to talking down the prices with the prime minister calling on traders not to increase prices

But price controls defy economic logic. If a product (e.g. a kilo of sugar) cost RM1.30 to produce, how could a trader sell it for RM1.20? If forced to so, the trader will have to make his profit somewhere else, ie, he must sell something else that returns more than average profit to make up for the losses of the controlled product.

Ask any average Malaysian if he or she knows any good that is under a controlled price or subsidised to a certain extent. Almost every essential product including cooking oil, sugar, rice, chicken, beef to name a few, are under price controls.

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 in some sectors of the economy which face government-imposed price controls.

I can suggest a better way for the government to help low-income earners, that is increase their income sufficiently to afford a decent living. Social welfare payments for those who are unable to earn a living and income top-ups directly from the government for low-income earners in the private sector would be more useful because they target directly the intended group.

A minimum wage law could also be enacted so that errant employers would not be able to exploit workers with impunity. The current system of subsidies, tariffs and price controls is flawed as subsidies benefit the rich more than the poor.

Tariffs make the prices of goods higher (and deliver fat profit to the protected industries) while price controls promote shortages and under-investment in the affected sectors. Let’s free the market.

So when I found out that Govt has just increased price of petrol by 30 sen, with the savings from subsidy been earmarked for improvement in public transport, I said.. YES.

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