On the 16th of March 2006 and after two years of negotiations, the Government finally announced the long-awaited plan to rationalise the market for domestic passenger air travel in Malaysia. Under the Plan, Malaysia Airline System Berhad (MAS) was allocated seven trunk routes in Peninsular Malaysia, seven trunk routes in Sarawak and five trunk routes in Sabah. Meanwhile, AirAsia was allocated 19 trunk routes, the other 99 non-trunk routes and rural air services. Furthermore, MAS will cease offering any discounts on its fares under the 'supersavers' programme. Instead, a price floor will be imposed on MAS. The Rationalisation Plan is scheduled to take effect on the 1st of August 2006.
Initial press reports suggest favourable reactions from both MAS and AirAsia to the rationalisation plan. In a joint press conference on the 27th of March 2006, MAS and Airasia pledged to cooperate and provide strong competition to the Singapore Airlines (SIA). However, as subsequent events were to reveal, both airlines have major disagreements over details of the Rationalisation Plan. In late April 2006, MAS appealed to the government to reconsider the scrapping of the 'supersavers' discount scheme citing reasons such as inflexibility to increase sales during off-peak periods and large investments in a few trunk routes (e.g. Johor Bahru - Kuching). MAS' appeals obviously worked as the govenment subsequently rescinded its decision on 'supersavers' scheme in early July 2006. The government also allowed MAS to operate three additional routes, namely, JB-Kuching, KL-Tawau and KL-Sandakan. The government's recent decision sparked a strong protest from AirAsia, citing unfair competition due to the RM1 billion that MAS receives from the government for restructuring purposes. At the same time, AirAsia also expressed disappointment over the failure to conclude any agreements on interlining with MAS.*
How did the government respond to AirAsia's complaints? In press reports dated 13 July 2006, the Transport Minister is reported to argued that the Cabinet's decision to remove the floor price for MAS should be seen as creating fair competition between the two airlines (since AirAsia was not going to be subjected to any floor price under the Plan) and this move was for the benefit of the people and the aviation industry. Did the Government do the right thing by changing its earlier decisions on floor price and allocation of routes? Was it being fair and transparent to both Airlines as well as the public?
The removal of the price floor for MAS will certainly, as claimed by the government, intensify competition between the two airlines. However, are the two firms competing at a non-level playing field and will the resulting competition be unhealthy? AirAsia's concern about the unfairness of having to compete with a company that access to RM1 billion funds from the government is valid to some extent. If there no specific rules on how such funds are to be used by MAS - it is plausible that MAS may indeed use it to cross subsidize its operations in routes that it is competing with AirAsia. Furthermore, if MAS uses such funds to engage in a price war with AirAsia, the playing field is not only uneven but will become increasingly so. Consumers may benefit from lower fares in the short run but if such a price war results in AirAsia exiting the market, MAS will emerge as a monopoly to the detriment of consumers. While such predatory behavior is not illegal in Malaysia (due to the absence of a competition law), surely the government would not tolerate such a conduct if it is the guardian of public interest.
In a media statement issued by the Prime Minister's Office dated 16 March 2006, the government did indeed state that one of the objectives of the rationalisation plan is to promote healthy competition in the domestic air sector. When, one might ask, is competition healthy? Unfortunately, there is no further clarification on what is meant by healthy competition. Turning to the literature on economics of regulation, one can perhaps infer that competition is unhealthy when an industry is a natural monopoly. This occurs when, due to high initial capital expenditures and a high ratio of fixed to total costs, the average cost in the industry declines as the volume of output or services increases. Under such circumstances, the industry achieves minimal cost if and only if one firm is allowed to operate. But is the domestic airline industry a natural monopoly? Prevailing evidence suggest that domestic airline industry is not a natural monopoly.** This implies that the allocation of high volume domestic routes exclusively to one airline is a bad idea. In this regard, the government's decision to allow MAS to compete in such routes is a correct one provided MAS do not engage in predatory pricing using funds obtained from the government.
Obviously, interlining is an issue the government should quickly step in to resolve. As the sole 'owner' of interlining rights, MAS clearly has the upper hand in this area. Such rights are a form of 'essential facility' that can impact MAS' competitors. Without access to interlining facilities, AirAsia may not be able to compete effectively in routes requiring such facilities. The government should recognize this fact and ensure that MAS does not use it to unfairly disadvantage AirAsia. The solution to such problems usually requires government intervention to ensure that the determination of the access pricing for such facilities do not lessen competition significantly.
Finally, an issue that is important but not highlighted by the media is the need for the government to be consistent in their regulatory decisions. AirAsia has a valid complaint on the sudden and non-transparent manner in which the government changed its decisions on key elements of the rationalisation plan. While such actions are laudable if they are undertaken to correct errors or improve upon the earlier plan, the government should try harder to get their key decisions right the first time so as to avoid creating unnecessary regulatory uncertainties to the deriment of the airlines, their shareholders and investors.
_________________________________________________________
*Interlining is an agreement between two airlines to mutually issue tickets and boarding passes for each other’s flights. A Under such an agreement, both airlines are able to provide automatic baggage transfers to passengers on their connecting flights.
** "Competition and Regulation in Airline Industry," Federal Reserve Bank of San Francisco Economic Letter, January 18, 2002.
Thursday, July 13, 2006
Thursday, July 06, 2006
Should Public Universities Recruit Only PhDs?
In the past, the minimum academic qualification for employment as a junior lecturer at the University of Malaya has been a masters degree in the relevant field of study. Young scholars with masters degrees were attracted to joined the University partly because of the prospect of obtaining a full PhD scholarship (from the University) upon confirmation as a permanent staff.
While this arrangement has attracted some bright young academics, it has also resulted in academic staff who remained with the university without completing their doctorate. The latter included those who were given full scholarships to pursue their doctoral studies but failed to do so. This clearly compromised the University's effort to further enhance and upgrade its graduate programmes (taught by PhDs) as well as its research profile. The ranking of the University was also probably affected - as the proportion of academic staff with PhDs is often used as a variable in ranking and accreditation exercises.
Recently it is reported that the University of Malaya has adopted a policy of recruiting only people with PhD for entry level academic appointments. Of course, such a policy is not new to many universities. A "PhD only" recruitment policy is in fact the norm at most universities abroad, particularly in more developed countries. However, it can argued that the implementation of such a policy may not be wise move for several reasons if additional reforms are not carried out.
To begin with, the current salary levels at public universities are not sufficiently high to attract those who have obtained their PhD from universities abroad. Obtaining a PhD degree abroad is an expensive affair. Even if most PhD abroad are not privately self-financed (which I believe is the case), most scholars with such degrees are likely to seek financial returns beyond what public universities can offer. If this is true, implementing a "PhD only" recruitment policy will only solicit applications from PhD graduates from local universities. Such a policy will only deprive our public universities (i.e. those implementing such policies) of people with PhDs from good universities abroad.
This is not to say that local PhDs are not as good as those abroad. However, while good scholars may thrive regardless of where they obtained their PhD, doctoral students abroad have a greater chance of early exposure to top-class doctoral education as well as the opportunity to develop international research networks (which is crucial for academic publications).
If the "Phd Only" policy is sub-optimal, can we tweak the existing system for a better outcome?
The previous system of recruiting new junior-level academic staff with a minimum of masters degree can work provided new incentive mechanisms are incorporated. New entry-level academic staff should be employed on a contract basis and be given full scholarships (with service bond) for pursuing PhD abroad at reputable universities. However, only those who have completed their doctoral studies should be hired as permanent faculty members. At the same time, universities should also consider hiring outstanding PhDs from local universities when such candidates are available. In addition, to ensure new PhDs continue to be research active, an academic tenure system can be implemented. Under such a system, only junior-level staff with sufficiently strong publications record be confirmed in service. Such reforms are also consistent with the Ninth Malaysia Plan allocation for training more PhDs for Malaysia's public universities.
While this arrangement has attracted some bright young academics, it has also resulted in academic staff who remained with the university without completing their doctorate. The latter included those who were given full scholarships to pursue their doctoral studies but failed to do so. This clearly compromised the University's effort to further enhance and upgrade its graduate programmes (taught by PhDs) as well as its research profile. The ranking of the University was also probably affected - as the proportion of academic staff with PhDs is often used as a variable in ranking and accreditation exercises.
Recently it is reported that the University of Malaya has adopted a policy of recruiting only people with PhD for entry level academic appointments. Of course, such a policy is not new to many universities. A "PhD only" recruitment policy is in fact the norm at most universities abroad, particularly in more developed countries. However, it can argued that the implementation of such a policy may not be wise move for several reasons if additional reforms are not carried out.
To begin with, the current salary levels at public universities are not sufficiently high to attract those who have obtained their PhD from universities abroad. Obtaining a PhD degree abroad is an expensive affair. Even if most PhD abroad are not privately self-financed (which I believe is the case), most scholars with such degrees are likely to seek financial returns beyond what public universities can offer. If this is true, implementing a "PhD only" recruitment policy will only solicit applications from PhD graduates from local universities. Such a policy will only deprive our public universities (i.e. those implementing such policies) of people with PhDs from good universities abroad.
This is not to say that local PhDs are not as good as those abroad. However, while good scholars may thrive regardless of where they obtained their PhD, doctoral students abroad have a greater chance of early exposure to top-class doctoral education as well as the opportunity to develop international research networks (which is crucial for academic publications).
If the "Phd Only" policy is sub-optimal, can we tweak the existing system for a better outcome?
The previous system of recruiting new junior-level academic staff with a minimum of masters degree can work provided new incentive mechanisms are incorporated. New entry-level academic staff should be employed on a contract basis and be given full scholarships (with service bond) for pursuing PhD abroad at reputable universities. However, only those who have completed their doctoral studies should be hired as permanent faculty members. At the same time, universities should also consider hiring outstanding PhDs from local universities when such candidates are available. In addition, to ensure new PhDs continue to be research active, an academic tenure system can be implemented. Under such a system, only junior-level staff with sufficiently strong publications record be confirmed in service. Such reforms are also consistent with the Ninth Malaysia Plan allocation for training more PhDs for Malaysia's public universities.
Wednesday, May 31, 2006
Malaysia Needs Further Regulatory Reforms
The recent increase in electricity tariff and the subsequent debates on its merits and impacts misses one important point - the regulatory regime for the infrastructure sector in Malaysia is in dire need of further reforms.
When many of Malaysia's infrastructure services were privatized during the past two decades, new regulatory institutions were set up to regulate private infrastructure operators. Unfortunately, many of the necessary regulatory reforms that accompanied or followed privatization were not carried out. In other words, regulatory reforms lagged privatization. As a result of this neglect, Malaysia has had to deal with many regulatory problems such as tariff revision in a fairly ad-hoc manner. This has not only angered consumers but created uncertainty amongst operators of private infrastructure as well as investors in the sector.
In the case of the electricity sector, the regulator/government should have established a schedule for tariff revision, for example, every three to five years. The process of tariff revision should also be made more transparent - including the methodology of tariff revision as in practiced in more developed economies. Adopting such a method does not mean that tariff levels will rise even faster compared to the currently adopted discretionary method. Regular tariff revisions reduce regulatory uncertainty and avoid the build-up of tariff revisions that are economically justifiable but not political palatable. This can only jeopardize the long term efficiency and viability of the sector.
The tariff revision process should also include incentives for productivity improvements. For example, even if the contracts between independent power producers (IPPS) and Tenaga Nasional Berhad reduce the latter's pricing flexibility - there is surely room for productivity improvements within TNB. If this is already included in TNB's tariff revision request - it should also be made explicit. Otherwise, it would give the impression to the public that the government is prepared to raise tariff levels to meet TNB's rising cost without any regard to TNB's ability to improve its productivity. The government should also not underestimate the effects of tariff increases in improving TNB's ability to raise funds in the capital market at more favourable terms, thus reducing its long term capital costs.
There is also a need to carefully consider the distributional effects of any tariff increases. For example, granting a partial increase in tariff by excluding households with lower electricity consumption levels, while politically popular, may burden other household groups and businesses excessively. If the government's intention is to provide relief for the lower income group - the government should instead provide subsidy to TNB for any lost of revenues incurred from not being able to raise tariff levels for this income groups. Otherwise, other groups may have to bear the additional burden of subsidising the lower income group - which is surely the responsiblity of the government. There are already other means of income redistribution such as taxation that are less distortive and which should be used for subsidizing the consumption of electricity by lower income groups.
The above regulatory problems are not unique to the electricity sector. Regulatory institutions in most infrastructure sector where privatization has occurred remains severely under-developed. The government should undertake further reforms to ensure that the quality of Malaysia's regulatory institutions matches the country's ambition of becoming a developed nation by year 2020.
When many of Malaysia's infrastructure services were privatized during the past two decades, new regulatory institutions were set up to regulate private infrastructure operators. Unfortunately, many of the necessary regulatory reforms that accompanied or followed privatization were not carried out. In other words, regulatory reforms lagged privatization. As a result of this neglect, Malaysia has had to deal with many regulatory problems such as tariff revision in a fairly ad-hoc manner. This has not only angered consumers but created uncertainty amongst operators of private infrastructure as well as investors in the sector.
In the case of the electricity sector, the regulator/government should have established a schedule for tariff revision, for example, every three to five years. The process of tariff revision should also be made more transparent - including the methodology of tariff revision as in practiced in more developed economies. Adopting such a method does not mean that tariff levels will rise even faster compared to the currently adopted discretionary method. Regular tariff revisions reduce regulatory uncertainty and avoid the build-up of tariff revisions that are economically justifiable but not political palatable. This can only jeopardize the long term efficiency and viability of the sector.
The tariff revision process should also include incentives for productivity improvements. For example, even if the contracts between independent power producers (IPPS) and Tenaga Nasional Berhad reduce the latter's pricing flexibility - there is surely room for productivity improvements within TNB. If this is already included in TNB's tariff revision request - it should also be made explicit. Otherwise, it would give the impression to the public that the government is prepared to raise tariff levels to meet TNB's rising cost without any regard to TNB's ability to improve its productivity. The government should also not underestimate the effects of tariff increases in improving TNB's ability to raise funds in the capital market at more favourable terms, thus reducing its long term capital costs.
There is also a need to carefully consider the distributional effects of any tariff increases. For example, granting a partial increase in tariff by excluding households with lower electricity consumption levels, while politically popular, may burden other household groups and businesses excessively. If the government's intention is to provide relief for the lower income group - the government should instead provide subsidy to TNB for any lost of revenues incurred from not being able to raise tariff levels for this income groups. Otherwise, other groups may have to bear the additional burden of subsidising the lower income group - which is surely the responsiblity of the government. There are already other means of income redistribution such as taxation that are less distortive and which should be used for subsidizing the consumption of electricity by lower income groups.
The above regulatory problems are not unique to the electricity sector. Regulatory institutions in most infrastructure sector where privatization has occurred remains severely under-developed. The government should undertake further reforms to ensure that the quality of Malaysia's regulatory institutions matches the country's ambition of becoming a developed nation by year 2020.
Thursday, April 20, 2006
A Scenic Bridge Too Far ...
The recent scenic bridge saga reminds me of the 1977 movie "A Bridge Too Far" - doomed from the very beginning.
I believe the Malaysian Government’s decision to terminate the construction of the scenic bridge is a correct one. If the construction of the scenic bridge was to continue, it would have considerably weakened the Malaysian government's bargaining position further. This is because the progressive accumulation of sunk investment (i.e. the scenic bridge) would have made the Malaysian government even more desperate to secure the Singaporean government's agreement.
Such 'hold-up' problems in situations involving mutually beneficial but ‘relationship-specific’ investments are widely observed and analyzed in industrial economics. In the scenic bridge case, the 'hold-up' may have changed the modus operandi of the negotiations over time. Media reports suggest that negotiations during the Mahathir Administration proceeded with the assumption that negotiations pertaining to the scenic bridge were conducted on a stand-alone basis but subsequently involved bundling of the scenic bridge with other issues (e.g. air space). Such developments reflect the weakening of the Malaysian government's bargaining position over time.
If a rational approach to the problem is adopted, the scenic bridge saga should not be allowed to sour the bilateral ties between the two countries. The initial set-up of the negotiations over the scenic already contained seeds of self-defeat. Both governments should recognize this and seriously consider resuming talks and negotiations on related and other matters. The former includes the possibility of a new full bridge that is mutually beneficial to both countries. Only this time, the officials involved should carefully reflect on the incentive structures in such negotiations.
I believe the Malaysian Government’s decision to terminate the construction of the scenic bridge is a correct one. If the construction of the scenic bridge was to continue, it would have considerably weakened the Malaysian government's bargaining position further. This is because the progressive accumulation of sunk investment (i.e. the scenic bridge) would have made the Malaysian government even more desperate to secure the Singaporean government's agreement.
Such 'hold-up' problems in situations involving mutually beneficial but ‘relationship-specific’ investments are widely observed and analyzed in industrial economics. In the scenic bridge case, the 'hold-up' may have changed the modus operandi of the negotiations over time. Media reports suggest that negotiations during the Mahathir Administration proceeded with the assumption that negotiations pertaining to the scenic bridge were conducted on a stand-alone basis but subsequently involved bundling of the scenic bridge with other issues (e.g. air space). Such developments reflect the weakening of the Malaysian government's bargaining position over time.
If a rational approach to the problem is adopted, the scenic bridge saga should not be allowed to sour the bilateral ties between the two countries. The initial set-up of the negotiations over the scenic already contained seeds of self-defeat. Both governments should recognize this and seriously consider resuming talks and negotiations on related and other matters. The former includes the possibility of a new full bridge that is mutually beneficial to both countries. Only this time, the officials involved should carefully reflect on the incentive structures in such negotiations.
Wednesday, March 15, 2006
Experimental Economics at University of Malaya
Today, experimental economics is widely recognized as an important sub-discipline in economics. The ultimate recognition of the importance of experimental economics came when one half of the 2002 Nobel Prize in economics was awarded to one of the pioneers of experimental economics, Professor Vernon Smith from George Mason University. Professor Smith was a student of the renowned Harvard economist, Edward Chamberlin who, in the 1940s, conducted one of the earliest published experiments in economics.*
The Nobel citation for Professor Smith reads as follows:
"for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms"
Having being fascinated by experimental economics for a long time, I finally mustered enough courage to conduct a small experiment in my class yesterday. My main motivation (aside from my own curiosity) was to expose my students to experimental economics. I attempted to replicate a trading game described in detail by Professor Charles Holt.** The game simulates a trading process in a pit market. In the experiment, each buyer or seller is given a poker card randomly. Buyers are given cards with either the diamond or heart (RED) symbol while sellers are given cards with the spade or club symbol (BLACK). The number printed on a buyer's card represents his/her valuation of a hypothetical good to be purchased. The number on the seller's card represents the seller's cost. Buyers are not permitted to pay more than their valuation of the goods while sellers are not permitted to sell at prices below their cost levels.
Forty students participated in the experiment. Due to time constraint, we only had time to conduct eight rounds of trading. Students assume the same role (seller or buyer) throughout the first seven rounds. In the eighth round the roles were reversed.
The results from the experiment were stunning. Our theoretical prediction for the equilibrium price is RM5.50 (Figure 1).
The transaction prices were fairly dispersed at the beginning of the trading rounds. However, by the sixth round of trading most of the transaction prices had converged to RM5.50 (Figure 2).
The experience of conducting this little experiment is certainly one of the most exciting moment in my teaching career. Judging from the animated haggling by the students during the experiment, I am sure many of them found this experience to be a fun way to learn economics or experimental economics.
I will certainly look for opportunities to conduct more experiments in my future lectures!
* Chamberlin, Edward. (1948). "An Experimental Imperfect Market", Journal of Political Economy, Vol.56, pp.95-108.
**Holt, Charles. (1996). "Classroom Games: Trading in a Pit Market", Journal of Economic Perspectives, Vol.10, No.1, pp.193-203.
The Nobel citation for Professor Smith reads as follows:"for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms"
Having being fascinated by experimental economics for a long time, I finally mustered enough courage to conduct a small experiment in my class yesterday. My main motivation (aside from my own curiosity) was to expose my students to experimental economics. I attempted to replicate a trading game described in detail by Professor Charles Holt.** The game simulates a trading process in a pit market. In the experiment, each buyer or seller is given a poker card randomly. Buyers are given cards with either the diamond or heart (RED) symbol while sellers are given cards with the spade or club symbol (BLACK). The number printed on a buyer's card represents his/her valuation of a hypothetical good to be purchased. The number on the seller's card represents the seller's cost. Buyers are not permitted to pay more than their valuation of the goods while sellers are not permitted to sell at prices below their cost levels.
Forty students participated in the experiment. Due to time constraint, we only had time to conduct eight rounds of trading. Students assume the same role (seller or buyer) throughout the first seven rounds. In the eighth round the roles were reversed.The results from the experiment were stunning. Our theoretical prediction for the equilibrium price is RM5.50 (Figure 1).
The transaction prices were fairly dispersed at the beginning of the trading rounds. However, by the sixth round of trading most of the transaction prices had converged to RM5.50 (Figure 2).The experience of conducting this little experiment is certainly one of the most exciting moment in my teaching career. Judging from the animated haggling by the students during the experiment, I am sure many of them found this experience to be a fun way to learn economics or experimental economics.
I will certainly look for opportunities to conduct more experiments in my future lectures!
* Chamberlin, Edward. (1948). "An Experimental Imperfect Market", Journal of Political Economy, Vol.56, pp.95-108.
**Holt, Charles. (1996). "Classroom Games: Trading in a Pit Market", Journal of Economic Perspectives, Vol.10, No.1, pp.193-203.
3G Spectrum License Award: A Flawed Exercise
On 3 March 2006, two additonal 3G licenses were awarded to Malaysian companies. What was surprising was that one of the incumbent operators in the mobile telephony market, DIGI, missed the boat. Subsequent to this, speculation was rife in the media that DIGI was denied a 3G license due to the fact that it is considered to be a foreign company. This was subsequently confirmed by the Minister of Energy, Water and Communications in media reports published on 12 March 2006. The reason given by the Minister was that "3G spectrum is a scarce national resource and preference should be given to local companies".
The Ministry's decision and the subsequent revelation of the underlying reason for this decision is puzzling indeed. If resources are scarce, then the government should have seriously considered using a beauty contest to screen for qualified applicants and then subsequently hold an auction of the licenses. This would have guaranteed that the companies that value such licenses most would obtain these licenses. The government would also have maximized the revenues it can obtain from the selling of 3G licenses. This would ultimately result in the efficient allocation of scarce resources such as the 3G spectrum.
An alternative and likely interpretation is that the government approached the problem in a nationalistic manner. This line of reasoning implies that the rents from owning 3G licenses should accrue to Malaysians or Malaysian companies. The two beneficieries are different. Selling scarce recources to private companies at prices that are below market value (as some analysts seem to suggest) do not necessarily benefit the Malaysian society. Rents from such a sale will accrue to only shareholders of these companies which constitute a minority segment of the Malaysian society. What would have been a better 'nationalistic' solution is for the government to extract maximum revenues from the sale of the licenses and redistribute it to the average Malaysian citizen via its fiscal policy.
A nationalistic approach to the problem also does not make much sense if Malaysia is interested to upgrade the competitiveness of its services sector and economy. This can only be achieved if we encourage Malaysian-owned companies to compete with foreign companies in markets abroad as well as in the domestic market. The past suggests that DIGI provides a healthy dose of competition in the Malaysian mobile telephony market. A pioneer in pre-paid mobile telephony subscriptions, it has recently embarked on innovative pricing strategies in the market. Of course, the Minister has argued that "DiGi can still be involved by renting the 3G spectrum or buying into the companies". However, this is not the same as direct ownership of the licenses. Renting the spectrum from other companies is likely to raise its costs above that of its competitors. Buying into another company that owns a 3G license would result in DIGI paying a substantial market price - presumably, a price that would have prevailed in an auction plus a mark-up. Furthermore, even if a nationalistic approach is adopted for whatever reason, surely we can allow one foreign company to compete against four other Malaysian companies on a level-playing field basis, at least for the benefit of the consumers and for the long-term development of the sector.
The Ministry's decision and the subsequent revelation of the underlying reason for this decision is puzzling indeed. If resources are scarce, then the government should have seriously considered using a beauty contest to screen for qualified applicants and then subsequently hold an auction of the licenses. This would have guaranteed that the companies that value such licenses most would obtain these licenses. The government would also have maximized the revenues it can obtain from the selling of 3G licenses. This would ultimately result in the efficient allocation of scarce resources such as the 3G spectrum.
An alternative and likely interpretation is that the government approached the problem in a nationalistic manner. This line of reasoning implies that the rents from owning 3G licenses should accrue to Malaysians or Malaysian companies. The two beneficieries are different. Selling scarce recources to private companies at prices that are below market value (as some analysts seem to suggest) do not necessarily benefit the Malaysian society. Rents from such a sale will accrue to only shareholders of these companies which constitute a minority segment of the Malaysian society. What would have been a better 'nationalistic' solution is for the government to extract maximum revenues from the sale of the licenses and redistribute it to the average Malaysian citizen via its fiscal policy.
A nationalistic approach to the problem also does not make much sense if Malaysia is interested to upgrade the competitiveness of its services sector and economy. This can only be achieved if we encourage Malaysian-owned companies to compete with foreign companies in markets abroad as well as in the domestic market. The past suggests that DIGI provides a healthy dose of competition in the Malaysian mobile telephony market. A pioneer in pre-paid mobile telephony subscriptions, it has recently embarked on innovative pricing strategies in the market. Of course, the Minister has argued that "DiGi can still be involved by renting the 3G spectrum or buying into the companies". However, this is not the same as direct ownership of the licenses. Renting the spectrum from other companies is likely to raise its costs above that of its competitors. Buying into another company that owns a 3G license would result in DIGI paying a substantial market price - presumably, a price that would have prevailed in an auction plus a mark-up. Furthermore, even if a nationalistic approach is adopted for whatever reason, surely we can allow one foreign company to compete against four other Malaysian companies on a level-playing field basis, at least for the benefit of the consumers and for the long-term development of the sector.
Saturday, March 04, 2006
Making Sense of Fuel Subsidy Reduction in Malaysia
On 28 February 2006, the Malaysian government announced the reduction of fuel subsidy by 30 sen. For many Malaysians, this announcement was a shocking news. The official reason for the reduction of subsidy given was that the money saved (RM4.4 billion) would be used to fund improvements in the country's public transportation system.
My immediate impression of the statement was that the money saved would be spent on development expenditures for the next five years. The five-year development plan, the Ninth Malaysia Plan (9MP), should be out by month. At this stage, I am sure officials from the Economic Planning Unit, Prime Minister's Department, would have computed the total development expenditures for the next five years. This could pose some problems to the government's effort to achieve a balance budget, a policy it announced a few years ago. In other words, the government savings from subsidy reduction would come in handy for 9MP expenditures. Hence, the government's reason for the subsidy reduction may imply that a the transport sector will be a key focus area in the 9MP. Alternatively, it could mean that the governemnt would find it difficult to balance its budget in the next five years without the fuel subsidy reduction.
There are many arguments why it makes sense to reduce fuel subsidies. One argument whch is attractive from an economics point of view but may not be fully appreciated by the general public is that any reduction of fuel subsidy tantamounts to reduction in the distortion of allocation of scarce resources (fuel, in this case). This implies that people would use an optimal amount of fuel if fuel prices accurately reflect their scarcity. If we take into account the impact of fuel consumption on the environment (externalities, pollution), we should even consider imposing additional taxes on petrol consumption.
The government has also repeatedly stressed that the fuel subsidy reduction would not burden the lower income groups as only the wealthier segment of society would be affected. This is probably not 100 percent true. Our society is not divided into two classes - poor and rich. I think the middle class and the poor will bear the brunt of the reduction in fuel subsidy. The poor would include those currently using motorcycles for work especially in the rural areas. There may not be sufficient transport alternatives in this sector. Unless the government can guarantee the current public transportation system is improved quickly and sustainably, the cost borne by the poor and middle class could be significant. This would include the increased travel time incurred by the poor and middle class who are now 'forced' to use an inefficient public transportation system. Ideally, the government should have guaranteed an improved public transportation system BEFORE it decides the reduce fuel subsidy. In other words, if you force people to use the public transportation system, you must at least guarantee that the supply of such services is adequate and of acceptable quality. Furthermore, as our previous investments in this sector indicates, large investments do not always guarantee that we will have an efficient transportation system. Good regulation including the placement of appropriate incentive systems for private sector participation is important.
My immediate impression of the statement was that the money saved would be spent on development expenditures for the next five years. The five-year development plan, the Ninth Malaysia Plan (9MP), should be out by month. At this stage, I am sure officials from the Economic Planning Unit, Prime Minister's Department, would have computed the total development expenditures for the next five years. This could pose some problems to the government's effort to achieve a balance budget, a policy it announced a few years ago. In other words, the government savings from subsidy reduction would come in handy for 9MP expenditures. Hence, the government's reason for the subsidy reduction may imply that a the transport sector will be a key focus area in the 9MP. Alternatively, it could mean that the governemnt would find it difficult to balance its budget in the next five years without the fuel subsidy reduction.
There are many arguments why it makes sense to reduce fuel subsidies. One argument whch is attractive from an economics point of view but may not be fully appreciated by the general public is that any reduction of fuel subsidy tantamounts to reduction in the distortion of allocation of scarce resources (fuel, in this case). This implies that people would use an optimal amount of fuel if fuel prices accurately reflect their scarcity. If we take into account the impact of fuel consumption on the environment (externalities, pollution), we should even consider imposing additional taxes on petrol consumption.
The government has also repeatedly stressed that the fuel subsidy reduction would not burden the lower income groups as only the wealthier segment of society would be affected. This is probably not 100 percent true. Our society is not divided into two classes - poor and rich. I think the middle class and the poor will bear the brunt of the reduction in fuel subsidy. The poor would include those currently using motorcycles for work especially in the rural areas. There may not be sufficient transport alternatives in this sector. Unless the government can guarantee the current public transportation system is improved quickly and sustainably, the cost borne by the poor and middle class could be significant. This would include the increased travel time incurred by the poor and middle class who are now 'forced' to use an inefficient public transportation system. Ideally, the government should have guaranteed an improved public transportation system BEFORE it decides the reduce fuel subsidy. In other words, if you force people to use the public transportation system, you must at least guarantee that the supply of such services is adequate and of acceptable quality. Furthermore, as our previous investments in this sector indicates, large investments do not always guarantee that we will have an efficient transportation system. Good regulation including the placement of appropriate incentive systems for private sector participation is important.
Wednesday, February 15, 2006
Why Blog?
This is my first experience with blogging. Why blog? For me, this is an opportunity to express my views on topics that I am interested to comment on. Rather than write full length articles, I thought blogging would be a quick informal alternative. Often, I had wanted to comment on many things but found it daunting to write a carefully crafted paper for the press etc. For those who might come across this blog site and read what I will write in the future, I do hope they find what I have to say to be useful and informative. Welcome to my thoughts!
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