Mon, 11 Jun 2001

Trying to sing the same old song: Is it worth it?

By Muyanja Ssenyonga

YOGYAKARTA (JP): It is an established fact that in times of shortage governments ration the provision of essential products in their endeavor to ensure a fair share of basic commodities for everyone.

This is to prevent the economically weak being priced out of the market as meager supplies drive prices to expensive levels due to high demand. No economy can boast of never having had to opt for what Adam Smith called, an abuse of the powers of the "invisible hand". Without such rationing, the economically weak would hardly gain access to necessities in times of recession, depression, war and other such calamities.

While price rationing is mainly the domain of the government, price discrimination -- the manifestation of the monopolist's might to squeeze as much out of the consumer's income by charging different prices to different consumers for the same good or service -- is both the undertaking of the state and private sector.

For state enterprises, the usual argument justifying the practice is that, as the main reason for the establishment of public bodies is not only the pursuit of profit but also the elevation of both individual and social welfare, one way to attain some profit is by demanding different prices to different consumers on what they produce; with those deemed more capable charged higher prices than the rest.

By so doing, cross-subsidies are achieved, leading to the narrowing of "the haves-and-have-nots" gap. Among private enterprises, the pursuit of maximum profit underpins the pricing policy of most private companies.

Thus, price discrimination provides the company with the opportunity to charge each category of consumers the maximum price for the product or service in line with their capability to pay, brings in more revenue and a better bottom line.

However, in the wake of widespread privatization, in developing and developed countries alike, the role of public enterprises to protect the poor in hard times is being challenged and even regarded by some, as no longer tenable.

The result is that gone are the days when state enterprises considered themselves primarily responsible for ensuring public welfare. No wonder such enterprises have followed their brethren in the private sector, putting profit above anything else. And where there is pursuit of profit there is usually a price to be paid!

It is an open secret that shares of state enterprises are considered safe havens for investors because of the edge they have over private enterprises in influencing prices of their products and services.

So one would expect shares of state enterprises to sell at a higher price in the stock exchange than private firms, due to their monopoly. That explains why the best way to privatize public enterprises is to maintain the state's controlling interest intact. There lies the quandary!

The saga over the "dual price" policy on petrol, which "price discriminates" consumers on the basis of the resource's use, should be seen in light of the government's efforts to make state-owned oil firm Pertamina more efficient, hence more profitable, by reorientating its operations toward market forces.

It cannot be denied that the major consequence of hemorrhaging petrol subsidies is the rise to preeminence of many of our conglomerates. Producing at heavily subsidized production costs, they have enjoyed high domestic prices for their goods, thanks to a protection policy that has kept competitors' products and services at bay.

This, in effect, made the domestic market captive for them to "scoop". So the removal of subsidies is expected to force such conglomerates to carry out efficiency-enhancing measures to boost their competitiveness. Moreover, by reducing oil subsidies, the state will be in a position to fund sectors that have, for some time, been left in the doldrums, such as education, health, and agriculture.

In fact, lower subsidies mean higher oil prices, reducing the incentive for smuggling the black gold to neighboring non-oil producing countries as the world petrol price and domestic price differential narrows. That would definitely reduce the customs office's budget meant to control cross-border smuggling. Nonetheless, the dual price policy seems to raise its own problems.

It is no surprise that without the ability to separate domestic and non-industrial users from industrial users raises the problem of arbitrage. This is manifested in attempts by ingenuous non-industrial users to serve as conduits for industrial users by purchasing petrol in abundance at lower prices, disposing it to industrial users at higher prices.

Certainly, with such a loophole, it would be wishful thinking to expect industrial users to purchase petrol at higher prices rather than paying non-industrial users to serve as their "collection points".

This phenomenon is already borne out by the discovery of many footloose "oil depots" in many parts of the archipelago. Because of such hoarding practices, the scarcity of petrol for all users escalates, compelling the government to undertake control measures to alleviate the situation.

Unfortunately, all control mechanisms require manpower, which costs money. So to track down culprits, new detecting devices, gadgets and vehicles are necessary: all of which boil down to draining the nation's exchequer.

Moreover, with control mechanisms in place, the room for corruption is given another boost, taking away as much, if not more, than the amount saved by the implementation of the "dual price" policy.

One would applaud the government's objective to reduce the drain of subsidies on the national budget as a commendable one, which is in fact long overdue. Nonetheless, the program put in place to realize that objective seems to raise more questions than answers.

Possibly, a total removal of oil subsidies would be one option, but the downturn that the economy is currently in makes it unacceptable to almost everyone bar idealistic economists. Yet another feasible option would be rationing the amount of fuel sold to individuals and other non-industrial users. Such an option is bound to falter along the way due to the high social and economic costs involved in making it operate, not excluding the intensification of kickbacks.

The most realistic option however, could be to charge the same price for all users with additional mechanisms put in place to reduce the price shock on the weaker sectors of the economy. This could be through projects similar to programs run by the International Monetary Fund for the alleviation of social costs of adjustments, whereby payments either in kind or cash are made available to the economically disadvantaged.

Without a doubt, such programs are liable to become new sources of corruption; ineffective as the beneficiaries utilize their pay-checks for merry-making or other expenditures that do not improve their welfare and by so doing defeat the initial purpose of the exercise, distorting the market.

Apparently, there is no panacea in these times of hardships. Nonetheless, the dual price mechanism is more disruptive than other likely options, which leads one to ponder what non-economic factors influenced the taking of such an option!

The writer is studying for a master's degree in psychology at Gadjah Mada University, Yogyakarta.