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  • Writer's pictureBait Al-Amanah

A step further away from finger-licking food prices

Updated: Jan 19, 2023

By Abel Benjamin Lim, Head of Economics Development of Bait Al Amanah and Juliana Lajuddin, an analyst at ZCG Consulting

Photo Resource: The Malaysian Reserve

MALAYSIANS are now bearing the brunt of skyrocketing prices of food, which threaten to exacerbate food insecurity. Yet, the most recently announced initiatives are most likely to worsen the problem in the long run.

The government, within the Economic Action Council, recently introduced a moving price ceiling for food items to help create an inclusive ecosystem for food security. The ceiling price is said to adjust according to the price of various inputs in the supply chain.

However, prices are set within the economy, which is complex and involves various human interactions and exchanges in the market. Prices involve both the supply and demand in the market, and cannot be artificially fixed or moved by the government.

The interconnectedness of prices is reflected on consumption and production decisions according to relative prices and profit expectations, reflecting the supply and demand structure in the market.

A decision has to be made within the market, not an outside force, to fully understand the actual and proper needs in the system. This leads to products which are demanded for and minimises wastage of resources.

Furthermore, any data sheet used to set these moving price ceilings will not give a full picture of the economy. This is because all of these data and information are constantly changing, where quantifiable information becomes obsolete by the time policymakers decide on the new price ceiling.

Also, a price is determined by supply and demand in the market for production factors. Players in the market, entrepreneurs for example, have the ultimate say on the use of their own resources and estimates how prices and market will change in the future. Therefore, a fixed price will not create a secure market for production factors.

Next, we support the need to ensure that the quality, quantity and food production are at the optimum level to ensure a continuous supply. However, we need to rethink the proposed mechanism for government-linked companies (GLCs), government-linked investment companies (GLICs) and government agencies to interfere in the entire supply chain.

First, will these state interventions be taken based on a clear understanding of what the market truly needs? How can these decisions be made if prices are being artificially set and moved?

Instead, the participation of these GLCs and GLICs in the absence of market price signals will likely end up in misled production decisions, leaving us in a worst-off predicament.

Second, government participation in the country’s business environment through GLCs and GLICs has historically crowded out real private investment. This is due to a perceived uneven playing field, due to preferential access to government contracts and favourable government regulations, including concessionary financing, direct subsidies and state-backed guarantees, among others.

As such, should government agencies still seek to intervene in the already established agro-food industry’s entire ecosystem from supply, feed, transport and marketing?

Furthermore, there is a strong public perception of poor governance of our GLCs and GLICs under the leadership of politicians. In addition, there is a current lack of effective and independent oversight of our GLCs and GLICs, which hinder the drive for greater accountability and transparency.

In this current lack of scrutiny, will state interference in the agro-food industry result in mismanagement, inefficiency and further exacerbate the food insecurity issue?

Instead of all the initiatives above which create market distortions, the government should effectively address market failures such as the existence of cartels, the lack of competition and the prevalence of hoarding.

Moreover, import duties and tariffs on consumable items and intermediate inputs used in agro-food production should be reduced to lower input costs. We need to steer away from policies which limit imports and stifle competition, which often lead to inefficiency and reduced incentives for increased productivity and innovation.

For agro-food industries where we lack the competitive advantage, we should seek to diversify imports instead of pushing for self-sufficiency.

* This article is originally published in The Malaysian Reserve, dated 18 June 2022

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