Fuel prices, inflation & the M'sian economy

The government motion as tabled by Datuk Shahrir yesterday (see Malaysiakini http://www.malaysiakini.com/news/84874) is platitudinous and short on substance. I have great respect for Datuk Shahrir and I sympathise with his ministerial portfolio. But, it's too bad that he is now the BN mouthpiece.
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We are now confronting a 41% increase in fuel prices. My courier guy just told me that they are imposing a 25% "fuel surcharge". At RM3.00 per document, the courier charge will now be RM3.75. This is inflation at the micro-economic level arising from the fuel price hike.

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Bank Negara has forecast a 5% inflation growth. I suspect it will be closer to 8%.

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Fuel subsidies distort the pricing mechanism

My concern is not so much with the fuel price hike because fundamentally the removal of subsidies from all consumption goods in the Malaysian economy will remove pricing distortions. It will remove the "make-believe" world originally created by Dr M. It is like Neo in The Matrix. Having taken the coloured pill he is woken up and unplugged from the make-believe world of the Matrix. That's what will happen to us when subsidies are removed.

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The worst part, as I have blogged about earlier, is that subsidies makes the Malaysian economy inefficient. It artificially lowers the cost of production and, therefore, create an artificially low price for specific goods such as petrol, rice, flour and sugar.

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The challenge for the government, whether BN or PR, is to have the political will or cojones to dish out the bitter pill. BN will claim that the removal of fuel subsidies does exactly that. True! But that is only one part of the story.

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Foreign labour as a perverse form of subsidy

Through the irresponsible policy of issuing permits for importation of foreign workers Malaysian employers have been able to keep labour costs lower than normal. I submit that this is also a form of subsidy.

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Worse than that, it is a subsidy to consumers of goods and services but it has a deleterious effect on the Malaysian workers and employees who have to face low wages and salaries.

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Worst still, the foreign workers create a leakage of wealth from the local economy by repatriating their wages back to their homeland. Does the government have the political will to drastically reduce the 2 million or millions more of foreign workers?

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Rent-seeking behaviour as a contributor to inflation

Let's not pretend anymore. Toll operators are rent-seekers. IPPs are rent-seekers. Government contractors who sub-contract 100% of the work are rent-seekers. They are parasitic creatures that draws an income from having inside access to the government contract-givers.

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Since they add nothing of real value to the process of creating goods and services, the percentages that these rent-seekers impose are passed on to the consumers in the form of added-on prices. Hence contributing to inflation.

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Tip of the iceberg

What I have described is only the tip of the iceberg. Of course, economic issues are complex. Of course, every facet of the economy is connected to another. Of course, dealing with one feature will be to the detriment of another economic feature. But not everything has to be Pareto optimal in the sense that an economic benefit need not be at the expense of another (see http://en.wikipedia.org/wiki/Pareto_optimum) e.g. lowering income tax need not mean that value-added taxes must be introduced simultaneously. Most things can be Kaldor-Hicks efficient in that economic policies can be designed to benefit more Malaysians and, yet doesn't make too many Malaysians worse-off (see http://en.wikipedia.org/wiki/Kaldor-Hicks).