Tuesday, June 24, 2008

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


ben said...

4 other things :-

1) We're subsidising Proton Read Here

2) To retire foreign workers, we need to shift our resources spent on NS (somebody said NS = Neraka (Hell) Service) setup more 'Technical (Skills) Institutes' for all and not communal based as suggested by MCA when they requested RM10m grant from govt. Australia in the late 80's made the mistake of amalgating the Tafe Colleges with the unis and today they're short of skilled workers.

These institutes operate day and night to for fulltimers and parttimers. This conveyor belt is very crucial to dovetail the weaning off of foreign workers. Otherwise, arbitrarily pulling the plug will be disasterous just like cutting fuel subsidy without first putting in place an efficient transportation and the others.

3) Project to alleviate traffic jam eg in Klang town. Why can't they work 24hours to complete. Traffic jam waste fuel subsidy, motorist's fuel, time and causes stress which reduces productivity. In Australia, all their roadworks are done 24hours because they have economists who present the costs & benefits to govt to complete it asap.

If a non-economist like me can make off the cuff suggestions, whatmore with our economic think-tank like NEAC. Somehow I believe that the knee-jerk decisions are made by politicians with consulting the vast experts sitting in some freezing room wearing winter clothings in Putrajaya!

4)In 2006 when fuel was raised to RM1.92, govt promised to utilise the cut in subsidy to improve public transportation. Today, 2 days later, fuel increased by another 41%, the only thing that they announced is they've signed agmt with Bombardier to deliver 4coach LRT to be delivered end of 2009. They must be sleeping for 2years and woke up when the crude oil touches $130. This is shocking.

ctchoolaw said...

Very good points. At the rste thingd sre going, we, as the rakyat need to keep highlighting the issues and offer solutions where we can. Good stuff, man.

Tim said...

Good Job! :)