KUALA LUMPUR, Jan 18 — The government must work with businesses to ensure the smooth functioning of the free market to counter underground and parallel trade, said the Institute for Democracy and Economic Affairs (IDEAS).
At the presentation of the group’s paper on the causes and consequences of illicit trade in Malaysia, IDEAS research director Ali Salman argued that market restrictions were one of the main contributors to the problem.
Such restrictions range from high taxation to unfriendly regulations for the business end, and weak enforcement against black and grey markets by the government.
“When there is a problem, the government must see what are the alternatives from the supply side,” he said.
“If a product becomes expensive, the market-based response would be to increase the supply of the product and bring down import restrictions.”
When appropriate responses are not available, prevailing demand for the affected products create a natural breeding ground for underground trade.
Ali said government intervention in the free market, such as via price controls, also caused distortions to the economy, such as skewing consumer perception about the reality of prices.
Controls such as import restrictions also hamper businesses’ ability to respond to shifts in either demand or supply with the speed necessary to prevent fluctuations.
“If price control is implemented, consumers make the wrong choice thinking a product is cheap, which further compresses the supply and gives the producer the wrong message,” said Ali.
Using tobacco products as an example, he said inconsistent enforcement has allowed the black market to take a firm hold in Malaysia.
He also suggested that stiffer sanctions could help mitigate weaknesses in enforcement, as these would serve as a stronger deterrent to would-be black marketeers.
“Enforcement of higher penalties would help reduce the burden, part of the enforcement failure by the Customs Department and the police is not having sufficient penalties and the implementation of such penalties,’ said Ali.
He added that IDEAS will seek to engage the government, including the Finance Ministry, to address the issue.
“Our calculations suggest that some RM8 billion is lost each year to the illegal trade industry, multi stakeholder engagement from the government and industry needs to be brought in as a platform or working group to address the issue,” said Ali.
“There also needs to be more public education and awareness in terms of counterfeit and contraband goods from a young age, just implementing high taxation is not enough.”
