Following the lifting of the import ban on cars, there was a sudden uproar when consumers realised a huge increase in taxes for new cars. While the taxes may be a cause, another reason for the cost escalation, in my view, is the ban itself. Simply put, if you ban, or limit something, the price of the commodity increases. This phenomenon is called artificial demand, or artificial scarcity – in microeconomics.
The concept of artificial demand is based on psychological human behaviour, whereby we place higher value on anything that is in short supply. The more the value we put on something, the higher the price. The entertainment industry and high fashion goods manufacturers practise this by issuing limited editions and selling the exclusivity narrative. Advertisements and commercials are solely based on creating artificial demand to stimulate sales.
Some large multinationals and unscrupulous corporations also practise artificial demand by manipulating the supply of goods into the market. Such wilful market distortions are illegal in countries like the US and the EU. In our case here in Bhutan, however, the artificial demand and price escalations may be unwittingly created through blanket bans and moratoriums.
Banning the ban
For quite some time now, I have been discouraging the practice of imposing blanket bans as a tool in governance. Bans, moratoriums, suspensions and changing policies have become a norm with democratically-elected governments after 2008. Blanket bans should be enforced only as the last resort and that too after thorough and independent research that factors in all short-term implications and long-term consequences, plus the collateral damages on other sectors. For instance, the “ban” on drones for private users has severely limited the filmmakers and the creative industry and its potential use in the delivery of goods to difficult locations and relief materials during disasters.
Bans may be effective as urgent short-term measures to stabilise a market or an emergency situation but are ineffective in the long run. Studies following the 2008 US financial crisis and the 2012 European debt crisis found that sporadic sales restrictions largely failed to support prices and reduced liquidity overall. Bans also skew long-term and larger opportunities for the overall economy and the employment market. Although it is hard to imagine something that has not happened before our eyes, researchers can mathematically model different options and possible outcomes, and do the cost-benefit analysis of any public policy. Bhutan aims to double its GDP by 2029 and become a high-income economy by 2034. If few things will thwart these achievable dreams, those will be unstable policies, unpredictable bans, subjective applications of “rules”, and the decline of the population.
Bans on car imports do not serve the desired purpose of limiting the numbers either. There have been several bans in the past 15 years. If you look at the data over the same period you can see that the upward trend has been the same. Instead, the bans have put our young people, who were working in the car dealerships, out of jobs.
Effects of bans and
artificial demand
Fear and FOMO. I am even inclined to think that bans drive up sales instead of reducing it. This is because unpredictability generates unfounded fears and suspense – plus market speculations. Fear emerges out of our reptilian brain, which produces the most primitive and illogical instincts in us. There is nothing worse than unpredictability to garner irrational behaviours. For instance, my Isuzu pick-up has almost hit 70,000 km. And at the rate I am using, it is safe to go on for two more years. However, what if there is another import ban and if this one becomes unreliable? With my wanderlust life, my skin and my work depend on it. It doesn’t matter that, as a teen, I survived on erstwhile BGTS trucks – some of which were falling apart when we were moving on the road. Like me, there might be many who will make premature purchases out of fear. One dealer told me they had several inquiries asking if there would be another ban because they wanted to wait for the current tax rates to be reduced.
Recovering lost sales. The management of STCB has clarified that it is also the manufacturers who have raised the prices. Of course, why wouldn’t they? The Bhutanese market may be small, but it still brings them an annual revenue of over Nu. 5 billion. They will try to make up for the zero sales in the last two years – and blame the price increase on technology, transport, steel prices, wages, crude oil and even their dogs and cats. I have also taken a “jab” at the dealers. They need to recover the overhead costs of the last two years. While the employees may have been laid off, they still had to pay the rent for the showroom, and utility bills such as electricity, water, and for the cleaners and watchmen. Ultimately, though, all these costs and expenditures will be passed down to the customers and it is the ordinary people who will bear the brunt of the ban eventually.
Revenge buying. We must also not be naive to think that foreign manufacturers and corporations are angels. They are aware of the artificial demand theory and they know they can cash in on it. They expect that our young salarymen, who have entered the job market in the last two years, will rush to buy no matter what. In sociology, this phenomenon is called revenge buying. The manufacturers also understand that unpredictable rules create unfounded fears in older people like me. Unlike us, their decisions are based on research and evidence.
The solutions
The State has two powerful mechanisms to regulate public finance: monetary and fiscal tools. These can be used strategically and tactfully to steer the economy. For example, if there is heavy public investment in mass transport, people won’t be compelled to buy private vehicles. If the government refrains from buying Prados and Landcruisers as pools, and instead goes for vehicles that are made in India, a lot of hard currency will be saved. There are many ideas as long as one is not stuck with old habits. No new solutions can be found for any issue with the same beliefs and behaviours that created the problem in the first place.
As for the rising number of cars in the streets of Thimphu and Phuntsholing (these are the only two places in Bhutan facing congestion), the long-term solution is developing public transportation, where everyone benefits. I would even go further by making it free, or heavily subsidised, like in some EU countries. Thimphu has about 70,000 vehicles in a population of little over 140,000, which is perhaps the highest car-person ratio in the world. There have been talks about electric trams and pedestrian streets. We should fish back those bold ideas. If pollution is the issue, this government initiated the idea of electric cars in 2014. I feel this can be reinvigorated through not only giving tax breaks but by making all government pool vehicles electric. There will be less misuse too and less dependency on fossil fuel.
Most importantly, the car import ban should not be nationwide. Thimphu’s municipal problem does not necessarily apply to other 19 urban centres. Good connectivity and seamless movements of goods, people and services are essential for an economy to grow. Beyond Thimphu, other places do not even have a reliable taxi service.
The lifting of the counterproductive ban itself was necessary, and I disagree with the school of thought that argues that we should have extended the ban. On the surface, it may look logical, but national monetary and fiscal policies are not like personal saving accounts and spending habits. Every action, big and small, by the central bank and the government, has huge implications on the economy, and ramifications on hundreds of thousands of businesses and people – most of which will never come to light.
While this current government may not be responsible for the increased tax rates, it has the power to review them without necessarily bringing them down drastically. It can also introduce some new innovative schemes. However, it cannot wash its hands off, because like anywhere else, and more so in Bhutan, we look up to the government for relief, guidance and leadership.
Contributed by
Dorji Wangchuk (PhD)
Professor, Engineer, Communication Scholar