Asia Pacific: Special Report - The price is not right

As democracy in the region increases, old pricing structures are in desperate need of reform - but not everyone wants to pay.

by World Business
Last Updated: 23 Jul 2013

How goods and services are priced is fundamental to the smooth functioning of any economy. Although prices in Asia have undergone considerable amendment in recent years, most notably in China, there remain areas that urgently need further reform.

Typically, they relate to the pricing of infrastructure usage and fuel. When governments step in with price controls and subsidies, the allocative efficiency of the pricing system is lost. Distortions lead to congestion and waste.

And so in Asia, roads are too congested, gasoline is too cheap and water is becoming scarcer. Governments are finding that as the region becomes more democratic and pressure groups find a voice, it is increasingly difficult to unwind old pricing structures. Most raw materials and industrial goods in China had two prices - one for approved state sector buyers and one that was more market-driven for other buyers.

The situation was grossly inefficient and encouraged massive corruption. State sector employees simply bought things at controlled, subsidised prices and sold them on for huge profits. Although many price controls were removed in 1994-95, a wide range of goods and services remain subsidised, including freight transport, tobacco, natural gas, pharmaceuticals and gasoline.

Price controls on liquefied natural gas (LNG) were strengthened in late 2005, but proved counterproductive. Supply contracted even further, increasing the upward pressure on prices. That same year, the government spent an additional $1.2 billion shielding domestic motorists from international gasoline price rises. Gasoline for commuters in Shanghai, for example, costs a third of the price in London.

Malaysia faces similar problems. Its normally placid population has been in uproar since the end of 2006 when the government announced a series of hikes in the tolls on five highways, ranging from 20% to 60%. The outcry has been so huge that the government demanded that local newspapers stop printing stories about the hikes. And yet the tolls are modest by world standards.

The biggest increase is for an expressway near the capital, Kuala Lumpur, but the new toll will still only be $0.41 for a private car. Compare this with the daily charge of £8 (nearly $16) simply to drive anywhere in central London, an amount that doesn't include parking. And yet Malaysians are incensed. Petitions have been circulated and the opposition has opportunistically joined the fray. User pays is a concept that has yet to become fully ingrained in Malaysia.

But Malaysians' dislike for the pricing mechanism to ration excess demand extends beyond road usage. A new bridge is to be built linking peninsular Malaysia to Penang Island, despite the fact that an impressive and hugely expensive bridge exists already. But it is busy and traffic backs up. The solution would be to raise the bridge toll and encourage commuters to use the very adequate ferry service and improve public transport. Instead, another bridge will be built at a cost of $850 million.

To compound these problems, Malaysia, like China, subsidises the price of gasoline at an annual cost of about $1 billion. Indonesia does, too, to the tune of $7 billion, as do Thailand and India. Successive governments in Indonesia have tried to reduce fuel subsidies and on each occasion their attempts have been met with demonstrations and rioting.

The sensitivity to the price of fuel relates not so much to the price of gasoline but to kerosene. Almost 75 million Indonesians do not have access to electricity; kerosene is the main fuel used for cooking and lighting outside the cities.

Apart from gasoline, kerosene and other fuels, the Indonesian government also controls the prices of staples such as rice, flour and sugar. Its logistics agency has imported almost 500,000 tons of rice since last October in an effort to keep the local price of rice down after previously banning rice imports for two years. However, the list of foodstuffs with controlled prices has been shortened; it used to include items such as cooking oil, fishmeal, cloves, chillies, garlic, and onions.

And, of course, Asia has yet to grapple with pricing pollution. Consumers and factories from China to Malaysia see rivers, sea and air as resources into which all manner of waste can be dumped free of charge. The solution is to make the polluters pay, but trade in emission credits seems a long way off for a region that is not yet prepared to expose itself to market prices for gasoline, rice or road usage.

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