Let public benefit from price falls

Source: The Star, Friday November 21, 2008

TINKERING with prices is pretty dangerous business at the best of times especially if the customer is not paying the underlying market price for the product for whatever reason.

In bad times, it becomes explosively risky and the wrong move can have wide-ranging repercussions, as the government found out to its dismay when it hiked fuel prices by some 40% on June 5 and introduced a complex mechanism of rebates to mitigate the effects on some sections of the community.

The country has not quite recovered from that shock and because of prices being sticky downwards - difficult to come down when they go up easily – the impact on inflation has been very severe.

The fuel price and electricity tariff increases, combined with rapidly rising food prices at that time, pushed inflation to a record level in 26 years.

In June, the consumer price index (CPI – the official measure of price increases for consumer goods) was 7.7% higher compared with the level a year ago.

Not only were consumers hit by this directly as food and fuel prices soared, the higher costs would have suppressed economic activity, leading to lower growth in output of goods and services and hence incomes as well.

With 20/20 hindsight, that move to hit Malaysians with a massive two-fifths jump in fuel prices at a time when food prices were already climbing, was disastrous, especially given the spectacular collapse of oil and prices of food components such as vegetable oil, rice and wheat shortly afterwards.

It is a painful reminder that the saying “What goes up must come down” does not apply to prices. Despite all the efforts of the domestic trade and consumer affairs ministry, prices have not budged much although costs of materials have fallen across the board.

That oil price hike represents a case study on how pricing policy should NOT be conceived and implemented and offers some important lessons for forward planning.

First, price shocks should be avoided as much as possible. A 40% increase in fuel prices represented at that time one of the largest single jumps in fuel prices anywhere in the world.

Inevitably, with such a shock, there will be expectations of high inflation and it will give the excuse for all and sundry to raise prices.

True, oil prices (see chart) were reaching new record levels almost everyday but the better thing to have done is to have opted for a gradual increase on the fuel price over a few months instead of trying to capture the effect of the increasing prices in virtually one go.

If that had been done, the government would not have had to increase fuel prices in one jump to the top of RM2.70 a litre for petrol from RM1.92 a litre on June 5 and then bring it down all the way to RM2.00 per litre earlier this week as oil prices fell.

With oil prices at record levels, the Government should have allowed for the possibility of lower oil prices shortly afterwards.

As it is, inflation has risen sharply and the higher costs of energy and poorer sentiment would have affected growth in output, an expensive lesson indeed for Malaysia.

But the Government does not seem to be taking lesson number two. If it wants prices to reflect the underlying market, it must bring fuel prices down when oil prices go down instead of only raising them when they go up – it must be a two-way process.

The public cannot be expected to put up with higher prices and then have the gains limited when oil prices fall.

The gains here must be passed onto the customer as well and not go to the Government through what are effectively increased taxes.

If you are removing subsidies, the fair thing to do is to remove the taxes associated with them as well.

One is hard put to understand why the Government wants to limit the gains to the consumer especially when passing on such gains will increase the disposable income, or money available for spending, of the man on the street. That will contribute to greater output as demand for goods and services increase.

We have already made one mistake when the oil price was going up. Let’s not compound that by making another one when the oil price is going down.

• P. Gunasegaram is managing editor of The Star. He says that the key to good policies is consistency in both word and deeds.

Pak Lah's economic reckoning

Our beloved Pak Lah had contributed more than enough for our economy...in terms of damages since he took office.
Now that he had swapped portfolio with Najib, how will the Ministry of Defense fare?

18 Sept, 2008
WALL STREET JOURNAL ASIA
Opposition leader Datuk Seri Anwar Ibrahim announced this week that he has enough parliamentary support to unseat the current government, led by Prime Minister Datuk Seri Abdullah Ahmad Badawi. If he does, Abdullah's lacklustre economic management will be largely to blame.
The prime minister has not introduced any substantive reforms during his nearly five years in office, preferring to rely instead on opening up the government purse. Under the Ninth Malaysia Plan announced in 2005, he expanded public-sector spending to RM200 billion annually from RM160 billion. In his Midterm Plan Review this year, he increased this outlay to RM240 billion. The national debt now stands at RM285 billion, up from RM192 billion in 2004. The official fiscal deficit has risen to 4.8% of GDP this year, from 3.2% last year. Revenue is being spent faster than it is coming in.
It's hard to argue that these outlays have served the broad public interest. Much of the funding has been channelled to elites in the majority Malay community, under the country's pro-Malay affirmation action programme. That has created discontent with many Malay who don't see the full benefits of the programme, and among the minority Chinese and Indians, who are excluded from it altogether.
Abdullah's stewardship has had a real impact on the economy. Capital flight has risen sharply; Malaysian investment abroad now exceeds inward foreign investment. The Kuala Lumpur stock exchange has lost almost one-fifth of its value this year to date. Malaysia's currency, the ringgit, saw its biggest one-month loss last month since the end of the dollar peg in 2005. Although GDP growth has averaged a robust 5% annual growth under Abdullah, that record is now under threat. Inflation reached a record 8.5% this summer. Job creation has reached record lows, as unemployment, particularly among young majority Malays, remains high. Ironically, only the opposition-led state governments are attracting new foreign investment — and without the federal government's help, no less.
Abdullah's 2004 attempts to promote growth and investment — such as through the promotion of the biotechnology and agricultural industries — have failed. He also fumbled discussions with the United States on a free trade agreement, which have now stalled. What Malaysia really needs is education reform and the liberalisation of its labour markets to improve its economic competitiveness.
The political opposition, in the form of Anwar and his Pakatan Rakyat coalition, have seized on these issues. They have promised to root out corruption and to implement a new economic policy to address the concerns of all ethnic communities in Malaysia. Their platform aims to move beyond populist spending to introduce structural reforms in government procurement programmes and in the management of government-linked companies.
When Abdullah assumed office in 2004, he inherited an economy in need of structural reform. Malaysians have had to pay for his poor stewardship through higher prices, stagnating wages and growing private sector debt. Soon, Abdullah may have to pay the political price for that record.