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Sunday, 25 May 2008

Tear down the Price Control Act - Part II

[I’ve been getting great feedbacks on my first email on the subject matter and I would say that the feedbacks are fair considering negative response and positive supports with the motion. All your responses have been fantastic and please keeps it coming to help me erase your doubt and misconceptions on the market economies.]

The history

George Santayana a Spanish philosopher once said, “Those that do not learn the lesson of history shall be condemned by repeating the same mistakes again and again.”

Let me get my facts right, in 1815, the British government introduced the Corn Law which designed to support domestic British corn prices against competition from less expensive foreign grain imports. But during the period of 1815 – 1846, the British learned the hard way of the abilities of the market forces not only just on trades but also to the social well being of the English people.

In the year 1846 they repelled the Corn Law, which proved to be counter productive that had blocked imports of grain, keeping grain prices and therefore landowners' rents artificially high. By doing so it had elevating of course the price paid by the industrial wage earners for a loaf of bread. My point is which I would like emphasize, the acceptance of Adam Smith's economics by then prove to be prompting the reorganization of commercial life in much of the "civilized" world. And I believed that is too what’s happening in Malaysia today.

Looking back at the British Corn Law, it is equivalent to our 1946 Price Control Act and our Price Control Measures of the currently food commodities.

In the world of global trade complexities and its interdependent exchange, you can clearly see that the extent that government "protect" portions of their populations from what they perceive as harsh competitive pressures, they eventually achieve a lower overall material standard of living for their people. Our problems of food shortages cannot be solve by controlling the prices of the products. We can keep on continuing mending and revamping the lower structure of the supply chain when the real problems are the bottleneck of state controlled producers. This is not compatible with the problems solving methods that we seek to address the food shortages issues.

I'm offering what I thought was a novel insight and hoped my testimony would add an important dimension to this debate and solve our misconceptions of the market economies.

Misconceptions of market economies

It is easy to understand the reason of the misconception of market economies thus we are too economically young to understand how market economies work and behave. And part of our culture doesn’t really inculcate the importance of wealth amassment. I don't think we have to embrace market economies the hard way just like the British have to do under Margaret Thatcher during the 1980s. If you can see it clearly, Malaysia, Britain (pre-Margaret Thatcher) and India (pre-Man Mohan Singh) economy appears to be at the point where they must accelerate to the amount of government fiscal stimulus (subsidies and government contract) just to remain stand still. This is clearly a very dangerous situation especially amid the global tension of the spiralling oil prices.

For Malaysian to be self-sustain and a major player in the global economy, it needs to accept challenges. We need to buttress our policies for stability with a commitment to free trade not protectionism; the most open competition policy in the world; flexibility markets; and substantially increased investment in people through education and related measures.

The importance of trust and voluntary exchange in market economies

We need to foster voluntary exchange for mutual advantage. The likes of government control economy such as wage control, price control invariably leads to grave unexpected distortions. It is understood that many people will fear competition because it will threaten their sense of status, which is critical to their self-esteem. I fervently believed that by abolishing price control, our market economies will weeding out the inefficient and poorly equipped, and by granting rewards to those who anticipate consumer demand and meet it with the most efficient use of labour and capital resources. These changes will lead to win-win situation for Malaysian consumer who will enjoy robust economy through fair competition and low prices of goods.

I'm not a politician. My job is an analyst who analyzes the market and current problems and suggests the real solution that can help in removing the “gangrene”. For the future world and what’s happening today is that voluntary promptings of individuals in the marketplace have displaced by many of the power of the state. Many regulations promulgating limits to commercial transactions have quietly been dismantled in favour of capitalism's market self-regulation. The underlying principle is simple: You cannot have both markets and a government edict setting the price of sugar, rice or flour. One displaces the other.

The importance market economies lack of restrictions

Malaysian need to look back and see what had happened with all the world government and its people that emphasize government meddling into businesses activities. In central planning there was no “creative destruction”, no impetus to build better tools. No wonder centrally planned economic systems have great difficulty in raising standards of living and creating wealth. Production and distribution are determined by specific instructions from the planning agencies to the factories, indicating from whom and in what quantities they should receive raw materials and services, what they should produce, and to whom they should distribute their output. The workforce is assumed to be fully employed, and wages are predetermined. Missing is the ultimate consumer, who in centrally planned economy is assumed to passively accepts the goods planning agencies order produced. Even in the country which has a big population such as Russia, India and China the consumers didn’t behave that way.

Market economies need signal to continue supply the demand

Without an effective market to coordinate supply with consumer demand, the consequences are typically huge surpluses of goods that no one wants, and huge shortages of products that people do want but that are not produced in adequate quantities. The shortages lead to rationing, or endless waiting in line at stores. Frankly, if we do not abolish the safety net such as the Price Control Act/ measures, that endless waiting line at nearby stores is what we will see next to happen in Malaysia.

In Malaysia today, most of the consumer products were produced based on the Just in Time (JIT) management methods of manufacturing. This JIT is so much embedded in big corporations especially the food producers and they behaved in a way what’s the demand of the consumer today. In doing so, they need the signals from market economies.

Without the immediate signals of price changes that make capitalist markets work, how was anyone to know how much of each product to manufacture? Without the help of a market pricing mechanism, our market economies had no effective feedback to guide it. Just as important, the planner did not have the signals of finance to adjust the allocation of savings to real productive investments that accommodated the population’s shifting needs and tastes.

The most prevalent cause of disrupted distribution of food then would go unreported and uncorrected until too late. After the explosion then we need government staff such as our Ministry’s staff or the army to do market economies job such as distribution of food to the rural area or any places which affected by the shock and awe of the consumers demand. We are not supposed to get entangled in market economies because we are government staff. It is not the nature of a government to do business. What we should do is that we should let the market economies work on their own mode which is self-correcting and trust me they will.

With free market come more choices

In a free society, the vast majority of transactions are thus, of necessity, voluntary. Voluntary exchange, in turn, presupposes trust. But trust has to be earned; reputation is often the most valuable asset a business has. You cannot force the consumer to buy certain products at certain rates. This will destroy the “creative destruction” needed by the market economies to self adapt to any market changes which will help them to keep on supplying the needs of the consumers.

By enforcing the price control measures we a giving a Carte Blanche to the wrong person to stay involve in market economies at the price of our children’s future. As far as I’m concern, the people in the rural area will benefited the most from free market economies, not just only by ensuring the needed products is sell at the consumers stores and the rural areas, but also by creating a new wealth for them to delve and venture. There is enough wealth for everyone in this world!

What I’m worried most, if we do not discard the Price Control Act today/ now by the time when Malaysian lost all their purchasing power to self negligence of the importance to have “creative destructions”, our economy will remain to rigid and it would not be able to absorb debilitating shocks as the increase of the oil prices currently and the rising of the new competitive players such as Thailand and India, and the most affected people that would be at the losing ends is those who lives in the rural areas. And yes, they might be one of our family members.

With this Price Control measures we actually were borrowing our children’s opportunity for growth, education and innovation. At the rate we are doing now, technology and international competition are extracting a high price for more intrusive forms of intervention that impair market incentives to work, save, invest and innovate.

Should we continue living good life by borrowing our children’s trust fund? We would be irresponsible if we were to do that.
Reference:

The Age of Turbulence - Adventures In A New World, by: Alan Greenspan. Allen Lane an imprint of Penguin Books, 2007.

13 comments:

afif said...

"help me erase your doubt and misconceptions on the market economies"

That's a tears shedding statement! Keep it up bro!! Save our country, let the market be our very economy itself. Let us all maximize our uniquely utilities independently without any politician intervention

Man, I got have solid faith on the market system

Tun Teddy said...

you don't know how much oppositions I've been getting at the ministry when I suggest to abolish this. all hell broke loose! especially from Bahagian Penguatkuasa who wants to retain this at the point that "orang miskin yang akan teraniaya dari market forces". These ppl don't understand how market reacts!

afif said...

Datuk Shahrir Samad is seemingly attempt to open up our economy. He wants to review the price control. Steel price has been freed from price control before. We might see more things getting better in future

Tun Teddy said...

I won't put too much hope on shahrir...

meo188 said...

excuse my to suddenly pop up in ur blog.

can u give your comment on the sudden fuel price hike in in Malaysia?

Tun Teddy said...

dear meo,

I'm writing the article about the price hike and I will publish it in my blog perhaps on sunday. thanks for stoppin by!

meanlin said...

Nicely done my friend. Keep it up. Some things to think about before you plunge headlong into the free market...

1) Strategic commodities...Rice, fuel, cooking oil. Must be controlled to some extent or the country risks vulnerability to manipulation by outside forces.

2) How will a completely free market affect the economic balance between races in Malaysia. You may not care or think it's an issue, but others will, especially if Malays end up on the short end of the stick. I'm sorry you have to consider such things in all your policy decisions but that's how the Malaysian system is built...

3) Your stance will not be popular with most people and it is easily attacked by those under pressure. Find ways to compromise or your stance may cause you more harm than good. Pick your battles, live to fight another day, take small steps, call it what you will, just don't fall on your sword over this.

Tun Teddy said...

what worries me most is that we never realized that before when the cost of production exceed the profits margins sanctioned by the government... these millers only produce the food products according to the quantities asked but the bulk was left outside the factory...

they are hoping that government with government manpower and government vehicle will distribute the food to the peoples all over malaysia.. in a way they are transferring the market economines job to the government that are doing a welfare towards the businesses sectors in keeping the production cost under control.. and we the government fall into their trap..!

afif said...

dear meanlin,

I can see your pessimism towards the free market. You see, we are in deep shit today because of our controlled economy yesterday, and some people believe that today's problem can be solved with yesterday's method.

Wake up dude, free market is another way that we can choose to make our life better. It ain't no perfect way, but it is sure not the same way that put us into so much troubles today

You ask then about how a completely a free market will affect local racial economic balance. Dude, we're talking about making our economy "freer" not "free". If you keep fixing prices, then how the firms has any incentives to increase production if the price is set too low by the government. Remember that general welfare is not all about reasonable prices, it also require the availability of goods.

Who says this is not a popular move? Paklah and Shahrir is behind it. Plus me :-)

meanlin said...

Dear Afif,

I should have specified that SUPPLIES of strategic commodities must be controlled to a degree, not PRICE. I'm not a socialist by any stretch of the imagination. Take fuel for instance since it's on everyone's mind lately...Malaysia has no fuel reserves other than what they can surge in domestic production. Since the government recently demonstrated that the country is at least somewhat dependent on the world market, it should prompt the question: "What if our supply is interrupted?" I'm all about free market price for oil but at some point Malaysia must build a reserve (this was one of the secondary purposes of the TRANSPEN pipeline project which was cancelled). The problem with stockpiling is that it will drive up the price of oil and/or deplete the treasury. Either way, ordinary Malaysians will be paying more money in some way.
My comment was written before I heard about the fuel price hike but it only serves to make my point. Since the price hike, Malaysians aren't too happy with the free market and my advice to Teddy was to be careful not to be too readily identified as the guy who wants to cause Malaysians to pay more for everything.
I do wonder why the government didn't give Malaysians more than just a couple days notice though...Not smart.
As far as my comments about race...The economy here is somewhat segmented along racial lines making it a certainty that some races will suffer more than others in the free market. All I was saying to Teddy was that race may be a factor to consider when taking a position on price controls. (As crazy as that sounds to me I think it's an unavoidable fact of life here.)
Anyway, I'm all for free market economics. I come from a country where gas is TAXED at the pump so I'm less than sympathetic with fuel subsidies. (I do sympathize with the abruptness of it however...Again, it was very clumsily executed.) I personnally think BN was took this opportunity to make the much needed reductions in subsidies by making Badawi, future ex-PM, to take the heat. Too bad BN doesn't seem to have any plans to guarantee the continuity of supply...

Tun Teddy said...

It reckons me about that transpipe line... nothing was mentioned about stockpiled. but there is an agreement for a bunkering but I don't know whether that can be considered as stockpile...

the facts that I knew from that transpipeline projects.. the oil is still belong to Iranians whether that tanker dock at Penang or Kedah... the oil still belong to Iranians when it was supplied through the pipe till it reach Bachok (Kelantan) pier and to the Tanker...

Malaysia will profits from the refinery in Gurun Kedah... nothing more and nothing less..!

meanlin said...

Teddy,

Part of the TRANSPEN was a several million barrel storage facility in the highlands of Kelantan. This type of reservoir is mechanically necessary for any pipeline but it had the added benefit of acting as a strategic reserve. Oil in the reservoir would have been bought by Petronas. As far as ownership of the oil in the pipe...you may be right but it didn't really matter whose oil was in the pipe, Malaysia would be able to tax it...The whole thing was a good idea that is now on hold since the March election.

afif said...

I speculate that the reason why the authority made notice of fuel price hike abruptly several hours before it takes place is to strategically give the rakyat less time to act panic. The night when the announcement was made, streets were packed with cars to gas station. We can see how Malaysians behaved panicky before fuel price raised.

Let say if the notice came out 3 days earlier, imagine how chaotic the whole country would become. People will rush to gas station with plastic barrels to keep as stockpile, dries up quickly the gas tank underneath the gas stations. Retail premises such as supermarket will be need to restock their shelves more frequent than usual, and of course will drive goods prices up in the process of stockpiling madness. The worse thing is when the rakyat taking the street and rioting. The opposition parties will take advantage on rakyat's anger and organize nationwide riots. Those are what might happen if the authority gave the people too much time to be notified. So several hours notification I believe is justified in order to keep thing in order.

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