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Sakmongkol ak 47

Wednesday 10 July 2013

Flawed Principles in Malaysia's Economic Thinking.

Here are a few observations from Milton Friedman. (1) Government can never duplicate the variety and diversity of individual action. (2) while government participation is required in a number of situations, further intrusion by the government  will lead to unwanted consequences.  In the process, government would replace progress by stagnation, substitute uniform mediocrity for the variety essential for progress. (3) For progress to take place, the bulk of economic activities must be organized through private enterprise operating in a free market. (4) Free market system is a necessary condition for political freedom.
On a more practical level,  where a government meddles and intrudes in areas which it does not control or has no business to meddle in the first place, problems emerge. The BN government has got their priorities wrong in wanting to copy PR’s strategy to reduce car price. They intrude into areas which they have no business to be in such as tweaking productivity and profit margins. These two agendas lie exclusively or mostly on the part of private enterprise. In the case of a car manufacturer, on the car maker.
In trying to reduce car prices, its belter for the government to manage the variables it has complete control such as excise and sales tax. It’s the government who imposes these and not the private sector. Its better for the government to mind its own business.
 On the 8th of July 2013, Mustapha Mohamed as minister for trade presented his closing arguments. This is the part where the minister concern will try to answer and explain all the issues raised against his ministry.
He offered to give his explanations on two important topics; (1) reduction of car prices and (2) Trans Pacific Trade Agreement. He proved to be adept at delivering a subject which is his forte- economics and matters pertaining to trade. He demonstrated an above average understanding compared to the rest of the BN ministers and back benchers. While he was countering arguments from the PR side, none of the BN backbenchers came to his defence other than offering the usual bellows from behind their seats.
He made one tactical mistake though. Instead of addressing the subject of reducing the price of cars, he chose to rebut what Rafizi Ramli has been saying about the subject. He has thus placed himself on the terms Rafizi has set. Perhaps accustomed to the usual muted response from UMNO and BN audience, Mustapha must have assumed the audience on our side is the same.
This kind of thinking proved to be the chink in his armour. He approached the subject by chronicling what Rafizi said on the subject. Now, unless his advisers have been on top of all what Rafizi said on the subject, he has cornered himself into a bind. Obviously from how Mustapha conducted himself, his advisers have failed him.
His first mistake was to conclude that Rafizi declared that PR will abolish excise duty on cars. Big mistake. Rafizi did say about the removal of excise duty but doing that over a period of 5 years. In other words, doing so gradually. Mustapha Mohamad insisted that Rafizi wanted to abolish excise duty in one go.
Mustapha Mohamed proceeded to extricate himself from the knot he tied himself with. But it was too late. He tried to redeem himself by giving a short lecture on how the price of a car is obtained.
Most of the members of parliament understood how, I think. The 4 elements that go into the pricing of a car are the cost ex-factory, profit margin, excise duty and sales tax. Mustapha went on lecturing on how improving the productivity the manufacturer reduces unit cost and hence can offer a reduction in car pricing.
I have never had the chance to observe the thinking of the government at close quarters. Now that I have, I realised where the fundamental flaw is. It’s a common flaw that runs through the entire gamut of BN government economic thinking. The same principle or thinking as it were underlined much of the overrated government’s ETP. The thinking is this: this government thinks it can generate economic progress by way of centralised planning. To do it must exercise complete direction over the affairs of economic agents.
Herein lies the fundamental flaw. Having wedded itself to the idea of centralised planning, it seeks to control variables outside its own area of competence.
Consider the attempt to reduce the car price. The 4 elements that Mustapha mentioned were (1) ex-factory price (2) profit margin (3) excise tax and (4) sales tax. All these cost elements are variables if and only if one party gets to control all. The government can’t control ex-factory price and profit margins, short of giving decrees. These cost elements are set by the manufacturer and the government is not the manufacturer. Being outside its control, the cost elements are no longer variables but parameters. You can change variables easily but cannot do the same on parameters.
The only elements the government can control are excise and sales tax. Rafizi’s and PR’s stand on reducing car price is correct. From the point of view of the government, the only elements the government can control are excise and sales tax. The biggest cost element is excise duty which is entirely under government control. Since it’s the biggest cost element and since it’s absolutely under government control, the price of cars can be reduced only by managing the excise duty.
The government has no business to meddle into the organisation of an economic activity such as car manufacturing. The car manufacturer, driven by competitive pressures will do whatever it can to improve productivity thereby reducing unit cost. It then prices the product by incorporating the desired profit margin.
The flawed thinking of the government is that it thinks it can organize an economic activity by central command. It thinks it can legislate its dictates in other people’s scope of control. The same line of thinking underlines the ETP and other economic initiatives. But that will be the subject of further articles.


Anonymous,  10 July 2013 at 07:12  

good article sir..although sometimes i may disagree with ur view but u really hit the nail this time..

bumi-non-malay 10 July 2013 at 11:53  

Selamat berpuasa datuk...... malangnya UMNO tak kenang apa erti puasa....teruskan dengan perangai sombong, bongkak, Zalim, Gila Korrupsi dan racis mereka. UMNO-BN rupanya hanya tunggu Rakyat turun padang GULINGkan mereka ...

UMNO-BN hanya mengamalkan SPIN dan Tipu Rakyat serta mengHAMBA ADDI kan Generasi melayu yang miskin!! Datang pilihan raya....macam hari raya bagi gula, ang pow....cium...hidup melayu, hidup UMNO....Harap orang melayu kat Kuala Besut TELANJANG UMNO dan Kuburkan UMNO kat sana...

Kali INI LAH!!

Anonymous,  10 July 2013 at 11:56  

If central planning works, USSR would be still in existence and Teng Xiao Ping need not try Capitalism.

Anonymous,  10 July 2013 at 13:44  

Syabas the most truthful and clear layman language piece i have ever read.
This is the start of all our troubles when the Tun Mamak Kerala devil meddle in everything.He not like Daim has no woman vice but The devil TUN is surely a gambler, liar and everything he touches he destroyed. Now b4 he kapok he is trying to destroy the Nation. Pray that his father devil call him b4 he achieve hsi goals>

Anonymous,  10 July 2013 at 20:00  


Selamat berpuasa. It's obvious that the federal govt wants to dip its finger into every industry, isn't it? By doing so, with its GLCs, it strangles the private sector. And when a GLC haemorhages, taxpayers money is used to bail it out. This ain't the way to make our country competitive. It's a highway to economic hara-kiri.


OneMalaysian,  10 July 2013 at 20:45  

Dear Sakmongkol

It worries us that arguably the brightest of the Ministers, this Mustapha Mohamed with a First Class in Economics from Melbourne University, talks like he was Bung Mokhtar. A couple of weeks ago he said in the press that competition between carmakers would bring prices down 20-30%. So there was, in his opinion, no need for the government to remove excise duty. Besides, he added, the government cannot afford to do away with RM7 billion in revenue from car excise duties.

What kind of thinking was that? If we add up all the profits of all carmakers in Malaysia it wouldn’t come any where close to RM7 billion. It probably won’t be even RM1 billion. So if all of them make no profit making cars, retail prices will still not come down.

This reflects the intellectual capacity of our ministers and also those of the senior officers in the civil service. I can’t help thinking that the brainpower in Parliament is found in the opposition benches. Soldier on!

Three Trees,  11 July 2013 at 04:45  

Dato'Sak,I think the difference is PR can balance the book by tendering out AP and removing excise duties but BN cos all the AP are in the hand of the warlords n cronies.Mustapha knows his stuff but he try to camouflage BN impotence.The ordinary rakyat in urban areas know this,that why BN were routed in Selangor

Anonymous,  11 July 2013 at 08:45  


You are now in parliament and should write smarter. Your opposition, the Barisan Nasional, is in parliament not to advance the nation's interests but their own personal interests. If they lower the excise duties, they will have less in their cookie jars to use as they wish. Would you want to cut your own salary and allowances?

So, the only way to reduce car prices, if the BN wants to keep its election promise, is to make sure that manufacturers cut costs to make cars cheaper in Malaysia.

Economics dictate that when a business corporation has to cut costs, one very attractive option is to go for cheaper and inferior quality substitutes for its product components.

When you are talking about cars being the final product, that means having more cars on the road that are not even roadworthy the moment they leave the factory.

Extrapolate this hypothesis further, and you will find the consequence to be motor accident fatalities to be significantly increased, i.e. the rakyat risks their lives driving such motorised tin-cans at 110km/h.

But from Barisan Nasional point of view, traffic accident fatalities, so long as it does not involve them personally, are just mere statistics that they will read out loud at the next parliamentary session and press conferences AND good reasons to introduce so-called road safety measures and devices made by overnight road-safety consultants at grossly inflated prices ....... and the cycle goes on.

So, you see, Dato. That is how things work for BN.

Anonymous,  11 July 2013 at 18:06  

If these people know what they are doing, we would not have been left behind by South Korea, Taiwan and S'pore...with other countries in the region catching up fast.

It's a BIG mess with permanent long term consequences.

hishamh 16 July 2013 at 11:17  

Dato Sak

I had occasion to look up the actual figures, which might be instructive. The industry data is from DOS and tax data from MoF.

For 2012, excise duty collection on cars was RM7.14 billion on sales of RM74.85 billion. That works out to an effective excise duty incidence rate of just 9.5%. Taken together with the sales tax, tax and duty paid on cars averaged less than 20% of the sales value.

In practice, excise duty is weighted towards imported CBUs and luxury makes, so the effective rate on cars the average Malaysian would be looking to buy is considerably lower, more in the 15% to 10% range.


Car companies make a lot more than RM1 billion.

For the latest year in which I have more or less complete figures (2010), sales hit RM67.99 billion of which about 60% is manufacturing (RM21.46b), imports (RM8.06b), and excise duties (RM5.2b) and sales taxes (RM6.2b).

Put another way, car makers have about a 40% margin on sales, or about RM27 billion in 2010. Plenty of fat to cut.

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