To control or not to control prices and the OPR — Jahaberdeen Mohamed Yunoos

JULY 18 — Two issues have caught the public attention last week — Bank Negara’s reduction of the overnight policy rate (OPR) and the other is the debate on the possible abolishment of the Price Control and Anti Profiteering Act 2011.

I was actually quite excited with the announcement that the OPR is reduced because it was really overdue. Whatever, the official statistics may be, I have been feeling that the economy is slowing down and not growing. 

A measure such as reducing OPR will certainly have the effect of lowering the cost of borrowing which in turn will make loans more affordable. The trick now is to make the loans available so that it may spur investment and consumption with the hope of boosting domestic economic growth.

Those in favour of abolishing price controls argue that price determination is best left to the free market to be determined by the forces of demand and supply. They argue that any interference with the market forces will not benefit the businessmen nor the consumers. This is the typical classical economic argument of laissez faire or free market argument. 

The basic hypothesis is that left to the market forces, the “invisible hand” will bring about an efficient distribution of goods and services and resources of productions. In this process, it is argued that the wealth of the nations will increase and so will the general welfare of the citizens. With respect, I have always been of the view that this shangrila situation does not exist beyond the economics textbooks.

In reality, income distribution among the citizens itself is hugely inequitable and often the gap between the have-nots and the haves are wide. In a pure market economy, the forces of demand and supply do not concern itself with the need of the citizens as a whole. 

It is purely concerned with satisfying the needs of those who have the ability and willingness to pay for the goods and services. In other words, businessmen whose motive is to maximise profits will only produce goods and services that they can sell to those who can afford it.

In the property market for example, many businessmen are not keen to go into the low-cost housing sector because the profit margin is very small. Hence, the government has to intervene in various ways — either by undertaking the task itself or subsidising the cost.

Similarly, without government interfering with the market, many essential products and services will be out of reach of the ordinary citizens or may be artificially priced in the market due to market manipulation by the very businessmen who religiously expound the virtues of market forces.

The fact which every economist worth their salt will admit is that for market forces to work effectively there must be “perfect” set of conditions such as perfect competition, perfect knowledge of demand and supply conditions and so. Life is imperfect with plenty of market distortions. 

Consumers are not well educated on their rights, lack knowledge of the diverse quality and availability of goods and services and so on. This is where the role of the government as the regulator of the market to achieve various economic and social objectives comes into play. Invariably, part of this role is to control prices in the market.

Admittedly, like almost everything else in life, there are advantages and disadvantages in any policy that is undertaken. If a price ceiling is set lower than the market price, it may lead to shortages of the products on the market because some businessmen may feel that it is not profitable enough or unachievable. This may also lead to an increase in the underground or black market economy. 

Likewise, with setting a floor price, there may be consequences that may not part of the objective. Nevertheless, I do not feel that the possible consequences should be the sole argument to deny the legitimate role of price controls to achieve other objectives than pure maximisation of profits by businessmen. 

Admittedly, it is a challenging task, but it is a task of balancing the price set, if control is felt to be necessary, with the approximate “true” market price.

Price controls to be effective should also be complemented with other measures such as some fiscal policy tools. I would also add the role of compassionate and efficient enforcement with a certain degree of flexibility where necessary is important so that price control do not cause undue harm to the businessmen or the consumers.

While I am generally supportive of market forces allocation of goods and services and resources, I do not believe that it should not be left alone without any interference by the government. 

This is because businessmen tend to want to maximise profits and in this regard then to blur the line between “making profits” and “profiteering.”

I would define profiteering as making excessive profits usually due to market manipulation (example, speculation or market control) and consumer ignorance. Profiteering is oppressive of the consumers; for example, observe the range of house prices in middle income areas. 

One wonders where these house prices were indeed determined solely by demand and supply or contrived demand and controlled supply.

It is very important that the government does a thorough study of the effects and benefits of the Price Control Act before it decides anything. 

It is equally important that the relevant ministry seriously looks at educating the consumers and be creative enough to come out with a policy that will balance the welfare of the consumers with the profit motive of the businessmen. 

Otherwise, the market forces may turn our society into a pure capitalistic and wage dependent society where in the long run, the ordinary citizens may end up being slaves all their lives working just to survive.

* Jahaberdeen Mohamed Yunoos is a senior lawyer and founder of Rapera, a movement that encourages thinking and compassionate citizens. He can be reached at [email protected]

**This is the personal opinion of the writer or publication and does not necessarily represent the view of Malay Mail Online. 

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