KUALA LUMPUR (Jan 11): The government’s intention to review the current mechanism of price control for essential goods is generally laudable among economists, as the current artificial low prices are discouraging supply and could eventually lead to a bigger problem such as threatening national food security.
Economists told The Edge that the new price control mechanism, if materialised, should prioritise creating competition among local producers, instead of an outright ceiling price in the name of protecting consumers from rising inflationary pressure while disregarding cost of production.
“[The government] may be reviewing to make it more targeted for [a] narrower group of users in the lower income group, those that would need it most,” said UOB Malaysia senior economist Julia Goh, when contacted.
“The government needs to keep in mind the spillover effect to other goods and services that could cause overall prices to spiral; if it is not properly controlled or implemented, the cost of living could escalate further,” she commented.
Domestic Trade and Cost of Living Minister Datuk Seri Salahuddin Ayub reportedly said on Tuesday (Jan 10) that the government will review the mechanism for controlling prices of goods and setting ceiling prices.
Apart from fuel, Malaysia also has price controls on other daily essentials, for instance chicken, egg, sugar, flour and cooking oil.
“Stop market intervention. Government’s regulatory interventions, though well intended, are often counterproductive. They distort the functioning of the market and the allocation of resources, as well as disincentive towards farm production,” said Socio-Economic Research Centre executive director Lee Heng Guie.
“The government’s primary focus is to create competition; not protection in every segment of the food supply chains — producer, procurement, stockpiling and food distribution system — so as to reduce costs, curb rent-seeking and plug leakages in the food management system,” he explained.
Lee also pointed out that price ceilings and controls cannot address scarcity, while fixing prices at artificially lower levels will merely enforce existing demand patterns, resulting in worse shortages for many consumers down the line.
Government’s subsidies and ceiling prices to make food affordable will burden the persistent budget deficits, and if it becomes unsustainable, it will pose material policy risks to the country’s creditworthiness, he added.
Transparent and leak proof process
An effective mechanism should be able to reach the targeted group in a transparent and leak-proof process, while being easy to administer, said Sunway University Business School professor of economics Dr Yeah Kim Leng.
“The implementation cost [should be] minimal compared to the subsidy saving [in the new mechanism],” he said.
The government is also urged to be more sensitive in understanding producers’ business environment in reviewing the new price control mechanism, said CHK Consultancy founder and CEO Dr Ch’ng Huck Khoon.
“Yes, they [the government] want to overcome the problem of high cost of living; they also need to understand producers’ problems. If you impose too many restrictions, producers will quit the industry and [this will] result in less supply,” he explained.
Singular Asset Management founder Teoh Kok Lin commented that it is crucial for the government to take into consideration the cost of production to avoid similar predicament of late, whereby producers are forced out of the business as ceiling prices are lower than their costs.
“Any adjustment to the price control mechanism should also be done gradually; while liberalising the market could encourage competition, which will push prices down, we cannot do it at one go and let global competitors come in and kill the local producers,” he said.
Asia Business Centre’s head of tax and financial consulting Datuk Chua Tia Guan concurred, saying that a gradual adjustment could avoid shock to the market and escalate inflation.
“Prior announcement of the holistic plan of such removal should be made to enable both the producers and consumers to adjust their supply and demand respectively.
“A clear timetable for such removal of the price control would be welcomed in order to facilitate such adjustments,” he explained.
Chua said while the government’s effort to shield the people from inflationary pressure is commendable, based on the worldwide experience, it appears that allowing the price of the goods to float according to market forces is the only long-term solution.
“This would also make both the businesses and the people more competitive, as they need to fight for their survival and not over-rely on the government’s subsidy,” he said.
Chua said price control is akin to a form of broad-based subsidy, as public financial resources may be diverted to those who do not qualify for government assistance.
“This is due to the fact that to support price control, subsidy is required to be provided to producers. As such, removal of price control would certainly ease the government’s financial burden,” he said.