I recently took a drive to Segamat, Johor, to see my cousin’s son, my godson, who is turning five this year. While I was in Segamat, which is my parents’ hometown, my cousin drove me around, which was very kind and sympathetic of her, given my serious lack of familiarity with the town and its roads.

Along the way, she had to refill her car with petrol. We stopped at a petrol station, where she pumped RON95. I noticed that the price for RON95 in Segamat, a town much smaller and much less prosperous than Kuala Lumpur, was RM2.05 a litre (before it was revised upwards by 10 sen on July 1), which was the same price as in Kuala Lumpur. How does this make sense?

The monthly configuration of pump prices in Malaysia is an example of a blanket policy. Every single petrol station in Malaysia is subject to the price set by the Domestic Trade, Cooperatives and Consumerism Ministry.

However, petrol stations are located everywhere in the country — in rural and  urban areas, agriculture-based locations as well as services-based locations, and small towns and large cities. Unless every single district in Malaysia — I use district here because it is the lowest official delineation of government – has the same median income, it makes no sense for the price of petrol to be the same across every single district.

One possible solution — if a district-based price setting is too complicated and simply not feasible — is a state-based setting of petrol prices. That way, people who live in Kelantan, where the mean gross state product per capita was RM8,273 in 2010, based on Department of Statistics numbers, do not pay the same price as people who live in Kuala Lumpur, which had a mean gross state product per capita  of RM55,951.

Certainly, there are other ways to gauge differentiating factors in petrol price setting besides mean income. One could also base it on the consumer price indices in the different states. If price levels are generally lower in Kelantan versus Kuala Lumpur, it stands to reason that petrol prices should follow suit. After all, no one is asking for the price of nasi dagang packets in Kelantan and Kuala Lumpur to be equalised.

There are certainly complications to such a mechanism. For one, there is the question of the capacity of the federal and state governments to launch such a mechanism. Secondly, there is also likely to be some “cross-state border”  issues. For instance, while it is unlikely that a car owner in Kuala Lumpur is going to drive to Kelantan just to get cheaper petrol, it is far more likely that someone in Penang will drive to Kedah for cheaper petrol.

Of course, this is hugely dependent on how big the gulf is between the prices. One potential mitigating factor is that it is likely that those who are more price sensitive (those with lower incomes) will be the ones making these trips. This can constitute a form of subsidy directly targeted at the poor. However, it is undeniable that there is a potential channel for abuse.

Thirdly, it is also questionable whether the government is the best authority to determine petrol prices. Prices may be more fluid geographically over the long run if a more market-based price determination system is allowed to flourish.

Another example of blanket policy thinking in the Malaysian public sphere was  the recent suggestion by Minister in the Prime Minister’s Department Datuk Seri Shahidan Kassim to impose a ban on 24-hour mamak restaurants and hawker centres in housing and rural areas.

The minister claims the proposal to restrict operation hours up till midnight was in response to complaints that such outlets were the reason for the rise in social ills nationwide. While I think that this particular policy choice and such complaints are utterly ludicrous, there is another issue at hand. Why should the federal government decide how commercial places are to operate in specific locales?

Even Prime Minister Datuk Seri Najib Razak’s statement that the government will not impose a ban on 24-hour restaurants and eateries in residential and rural areas is part of the same issue. Why is the decision to ban or not to ban a federal decision?

I do not deny that there are some 24-hour eateries that could be disruptive to a neighbourhood. Yet, I also believe that there are many 24-hour eateries that are part of a neighbourhood’s culture and add value to the community. Why should these be banned as well?

Thus, the decision to restrict the operating hours of 24-hour eateries should be taken by the local government, not the federal government. A local government can investigate more carefully the complaints raised by members of the community, more so if it was elected by the local community, but that is a story for another day. Like a blanket petrol price, on this issue, a blanket restriction at the federal level makes no sense as well.

 I am not suggesting that non-blanket policies are necessarily the optimal policy choice. Income tax policy is an example where blanket rules should apply. After all, one can easily imagine a rich individual who lives in Kuala Lumpur buying a house in Kota Baru and registering it as his official tax domain to enjoy the lower tax income rates that would prevail there if non-blanket policies were in place.

In this case, a blanket income tax rate system is likely the optimal choice. This is also true of sin taxes such as taxes on cigarettes and alcohol, of legal systems and punishments, and of the content of the education system.

What I am suggesting, however, is simply that the federal government consider the issue of geographic differentiation of policies, particularly in cases where different locations have vastly different attributes. For instance, it may well be true that a 6% Goods and Services Tax across the board is the optimal rate, but one can easily argue that some consideration for geographic differences due to attributes such as mean income or poverty rates should be taken into account.

The thinking behind final policy decisions must be as flexible as possible to ensure that the policy itself is as welfare-enhancing as possible, and as welfare-just as possible.

Nicholas Khaw is an economist-in-training at Harvard Kennedy School. Prior to this, he was an assistant vice-president of the research division of Khazanah Nasional Bhd.
 
This article first appeared in Forum, The Edge Malaysia Weekly, on July 6 - 12, 2015.

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