Economic Sense Must Prevail

It is with some amount of dismay that I read about Malaysia's latest decision to impose and maintain a ceiling price on dressed chicken. Surely the government's decision to countervene the market is not its first, yet one cannot but wish that some economic sense would eventually prevail in the troubled economy.

A chicken and egg problem

As any undergraduate student of economics knows, a ceiling price on goods is detrimental to the smooth functioning of the market system - it distorts prices, sends erroneous signals to consumers and is, ultimately, unsustainable. The decision to wield the might of the law to impose what would seem to be an 'equitable' solution would only serve to prevent the market's natural mechanisms of resolving price from working. Undoubtedly, black markets would arise and the primary aim of the government regulation would be defeated. The argument that market failure has developed simply does not hold water, as it is difficult to fathom the possibility of such a common food item not possessing substitutes.

History repeated

Of course, this is not the first time that the government has attempted to override the market. Trading regulations on the Stock Exchange of Malaysia which restricts trading will only lead to a host of problems in the long run. For sure, such protectionist policies will serve to increase stability in the short run, but the long run implications include a loss of investor confidence in an already ailing economy, a withdrawal of genuine investments and a depressive effect that may spread to other areas of the economy. Economists as long ago as David Ricardo (in 1817) have established the folly of trade restrictions even for properous nations. Capital restrictions, although different in character, are very much similar in essence. For a troubled economy like Malaysia's, battling to stay afloat, the consequences of such restrictions are further exacerbated.

The decision to fix the Malaysian ringgit against the US dollar seems like a rational one, and even a successful one, as evidenced from Malaysia's current currency stability. Yet the policy overlooks some key issues. The fixed regime may have been the ideal way to reduce the severe monetary shocks faced by the economy during the Asian financial crisis. Yet, such a system is impotent when it comes to coping with real shocks, which are much better insulated by a floating regime. The conclusion here is obvious. A managed float that offers some degree of exchange rate management is superior to either of the polar cases. This bit of economic sense has long been established, and its efficacy is evidenced by the overwhelming number of countries who practice a managed float.

Political influences

It is impossible for economics to be divorced from its intimate links with law and politics. But when politics oversteps the boundary and attempts to provide populist solutions to basic economic problems, it is inevitable that such policies cannot be sustained. So let the politicians concentrate on politics and leave the economics to the economists.

It would seem that the best solution at this time would be to limit government interference in these basic economic issues, and to concentrate on restoring investor confidence through increasing overall competitiveness. Allow the millions of people who make up the market economy to make their unhindered choices, and as a result bring about a healing of the ravaged economy, with a little help from Adam Smith's 'invisible hand'.

This article is unpublished.