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KR1M: Understanding the meaning of subsidies

August 2, 2017

Subsidies are subsidies whether it is for operations, capital expenditure or the rental of stores below market price.

COMMENT

hamzah-kr1m-1

By TK Chua

Did Minister Hamzah Zainudin understand the meaning of “subsidies” when he said that the RM106.37 million spent on Kedai Rakyat 1Malaysia (KR1Ms) was purely for the purpose of setting up the stores nationwide? He denied the government had ever subsidised the “operations” of KR1Ms.

Subsidies are subsidies; does it matter whether it is for operations or capital expenditure? When the government set up a store for me to do business, surely my cost of capital will be very much reduced. If this is not a form of subsidy, I wonder what is. Similarly, if the rental of the store is at below market price, this is yet another form of subsidy.

Therefore, it is wrong for Hamzah to say that there was no subsidy in KR1Ms. Similarly, it is wrong for the owner/operator of KR1Ms to say that they received no subsidy from the government. RM106.37 million has gone somewhere. Who benefitted from it?

Logically and ceteris paribus, goods sold at KR1Ms should be at lower prices when compared with other stores. If not, someone has pocketed the subsidies, not the final consumers. I am assuming that KR1Ms nationwide should be able to operate at the same cost efficiency and profit margins as other stores.

Right now, KR1Ms are accused for selling at higher prices despite the lower rental and set-up cost when compared with other stores that received no such benefits.

For KR1Ms to sell at higher prices, two things must have happened: (i) KR1Ms are grossly inefficient, and despite subsidies received, were not able to compete, or (ii) KR1Ms have indulged in profiteering i.e. making supernormal profit.

From day one when the concept of KR1Ms was first mooted, I expressed my reservation about them. Malaysia has a functioning market economy, we must let it work.

Setting up KR1Ms is anti-market, anti-competition and breeds inefficiency and corruption.

Instead of setting up “government mandated” stores, we should free up distribution channels to allow greater participation from whoever who wants to engage in retail trade. With rare exceptions, competition always drives efficiency and lower prices.

I have watched Malaysia’s economic management for a long time. For us, it is always price control, enforcement, regulations, subsidies, and state mandated monopolies.

This is in essence what the communists did. They breed inefficiency and corruption.

Let the market and Adam Smith’s “invisible hand” work, and everything will fall in place. There are many examples of successful and well managed economies with minimal government intervention.

Intervention for equity, social justice, fairness, and other altruistic reasons are baloney really.

TK Chua is an FMT reader

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