Overcoming The Fuel Price Hike

Posted by SM Maulana
Not every country sees dark clouds over the horizon. China has racked up an export growth of 28% in May 2008. As of April 2008, Germany saw 27 consecutive months of decreasing unemployment figures. Buoyed by real demand, these economies are functioning at almost full capacity.

Syed Akbar Ali

The spike in oil prices has put us in a crisis situation. We must put the economy on an emergency footing and start thinking out of the box again to solve yet another economic crisis. However unlike the Asian Financial Crisis of 1998, which only affected some Asian economies, this oil price rise is a worldwide phenomenon. Everyone is equally hit.

There have been protests and deaths in Spain, Thailand and India. Prices of vegetables, bus fares, ferry tickets, and everything else, is going up. We need not fear this price increase too much. Right now we are still in the transition period, we are reeling from the immediate aftermath of the price shock but there will be a stabilization effect that will set in soon. We must immediately put into effect strategies and policies that will increase the productivity and output of our people. That is the only way our people can overcome the price increases.

The oil producers are equally perplexed. There is no shortage of oil in the ground. Saudi Arabia has announced that they are prepared to pump as much oil as the world needs. The costs involved in producing oil have not increased as much as the selling price of oil. As a result, the Gulf States have amassed US$1 trillion surplus from the higher oil prices. The world consumption of oil has increased but not supernaturally. So why is the price of oil increasing so much? Obviously there is many a slip between the cup and the lip, or between the oil wells and the gas station.

Speculation is the obvious answer. Speculators are the main cause for the rise in oil prices. Perceived tensions, like an imminent attack on Iran by the US and Iran developing nuclear weapons, have been capitalised by the speculators. There is also a shortage of refining capacity around the world, especially in the United States. The Government must resuscitate and support the plan to build the oil refineries in Kedah and the Kedah – Bachok oil pipeline project.

The Prime Minister has suggested that futures trading of oil be suspended. The world markets may not agree to this because the futures market is essential for their orderly functioning. Genuine players like grain millers, oil refineries, smelters and food manufacturers need to book prices ahead for their manufacturing needs. However, we can check over speculation by other methods.

The bulk of futures transactions for genuine commodities purchases range from three to 12 months. Knowing this, special taxes or transaction costs can be levied for futures contracts that extend for more than six months. Similarly, financial derivatives that extend beyond three months can also be taxed or levied with charges. This will certainly cut out the speculators but leave the field open to the genuine buyers and sellers of tangible products.

The National Economic Action Council or NEAC must reconvene to handle the crisis situation – on a daily basis. If fuel prices have gone up 40% is it fair if ferry tickets to Pulau Tioman or Labuan have increased by almost 100%? What are the reasons for such a drastic increase in the ferry tickets? What will be the impact on tourism in those islands? Are other factors involved? These are the type of micro issues which the NEAC can help sort out on a daily basis.

Some quarters have disagreed with the suggestion that to earn extra income to keep up with the higher costs of living the Civil Servants should be allowed to moonlight at second jobs or run their own businesses. I agree that this may not be a good idea. There are already schoolteachers and headmasters who moonlight as insurance salesmen. Recently, a headmaster handed his insurance company business card to my wife in his office at the school. The danger may arise when we refuse to buy a service or product from a moonlighting Civil Servant they may not serve the public well or worse force the public to do other business with them first.

Instead, I feel the Government should suspend the leave for key decision makers in every Government department from the Ketua Setiausaha Negara up to District Officer level in the States. Files should be cleared, all applications that generate economic wealth like land and development approvals, factory approvals, machinery import approvals etc should be expedited by them. Once there are no more backlogs they should be allowed to go on leave again. The sooner we move economic activity the faster our people will reap the benefits. The Civil Servants must be made to understand this simple fact.

Personally, I feel that removing the fuel subsidy is a good thing. The closer we are to real market forces, the better chances we have of overcoming higher prices through better efficiency and competition. The peoples’ productivity and income must be increased to meet the rise in the cost of living. People can only increase their productivity and income at their places of work, i.e. in the plantations, factories, businesses, banks, shops, offices, etc., where they work. Therefore, let’s make it easy for business and industry to go about doing their business and generating wealth. If business and industry can increase their activity then their workers (i.e. the people) will earn higher incomes. Now is not really the time to be increasing taxes on anything. We should be looking at reducing taxes. For example, the Government may want to consider suspending personal income tax for this year for all those who earn less than RM500,000 per year. This will give a breather to businessmen and owners of small and medium size enterprises in this bracket. They will have extra resources to expand their businesses or explore new businesses.

The Government can temporarily suspend (say for three years) certain administrative and bureaucratic requirements like approvals, licenses, APs, import duties, etc., on cars, machinery and spare parts for all classes of heavy equipment useful for generating economic activity. We have to really think out of the box. This is a crisis situation and we have to respond quickly.

We also need to attract high technology FDI as well as job creating FDI on an urgent basis. It is of less value added if we count foreign investments in the stock market or even the property sector as FDI. Most of our construction labour is either Indonesian or Bangladeshi. Wages in this sector are repatriated outside the country. To date, the responsibility of attracting FDI has fallen largely on the Ministry of International Trade and Industry or MITI. Here too we need to think out of the box. I feel every Ministry should be given targets to attract FDI in their respective sectors. Ministers as well as deputy ministers should be given specific targets to achieve. For example, the Ministry of Higher Education should be given annual targets to get established foreign universities to open branch campuses in Malaysia.

The Ministry of Health can be given annual targets to attract world-class pharmaceutical companies to invest in research labs and production facilities, international healthcare companies to open hospitals and health tourism projects and so on. The Ministry of Tourism can be given annual targets to attract global hotel chains to open resorts and hotels here. The Ministry of Transport can be asked to secure global transport operators, airlines, shipping companies, freight forwarders to set up operations here. Even the Ministry of Defense can be given targets to get high technology defense manufacturers to set up shop in Malaysia.

It is high time that we reduce the number of low skilled foreign workers and foreigners in the country. They are low value added and also repatriate large quantities of funds overseas. On the other hand, there must be no restrictions at all on hiring highly skilled foreign workers especially those who are technically qualified. We really need to increase the value added skills in the country.

Not every country sees dark clouds over the horizon. China has racked up an export growth of 28% in May 2008. As of April 2008, Germany saw 27 consecutive months of decreasing unemployment figures. Buoyed by real demand, these economies are functioning at almost full capacity. As prices of manufactured products increase all over the world, cheaper Chinese products will be even more in demand around the world. The strong growth in China and also India are already acting as counterweights to any slowdowns in our traditional markets. The United States too has significant resilience to withstand higher fuel prices. The Americans usually become more efficient in double quick time. We need to respond quickly and wisely to the fast changing economic scenario. We need universal workable solutions. Thank you.

Syed Akbar Ali is a businessman and writer. He was a former Economic Consultant at the National Economic Action Council and the author of the bestselling book ‘Malaysia And The Club of Doom – The Collapse of the Islamic Countries’.

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