Black market a drag on Malaysia’s economy

IN a recent investigative expose on how fake goods in Malaysia are putting lives in danger, it was reported that this country had the “biggest market” for counterfeit liquor. 

A municipal councillor in Penang who has been spearheading a movement against bootleg alcohol for the past six years, P David Marshel, shared that many people found the original products expensive. 

Priced out of their budget, they turn to moonshine options which are 70% to 80% cheaper. 

Malaysia also ranked number one globally for trading in illegal cigarettes (59%), followed by Brazil (50%), according to an Oxford Economics report titled The Economics of the Illicit Tobacco Trade in Malaysia (June 2019). 

However, these figures have since increased to 65%, meaning seven out of 10 cigarettes sold in this country are illegal. Approximately 12.2 billion illegal sticks were estimated to have been sold and consumed here in 2019 alone. 

This is an alarming ratio, given the latest World Health Organisation (WHO) statistics which stated that one in every 10 cigarettes and tobacco products consumed globally is estimated to be illicit, with a total of 132 billion illicit cigarettes consumed over 57 countries. 

Yet, Malaysia remains a well-known shopping haven, especially for those seeking “branded luxury” goods. 

Stores selling counterfeit items are aplenty throughout the country, both in unregulated outlets such as roadside stalls and select provision shops as well as established ones in shopping malls and popular online platforms. 

However, it is worrying as trends show that counterfeiters have expanded their range to cover consumer goods.

Federation of Malaysian Consumers Associations (FOMCA) reported that these include everyday items like appliances, foodstuff, medicines, cosmetics, automotive parts and even aircraft parts, among others.

With food items and medical products slapped with fake labels of well-known manufacturers, the danger is that its contents may not be what it claims to be. 

Consumption of such falsified products have led to cases of food poisoning, skin allergies, organ failure and deaths.

“With the constantly improving quality of packaging and labelling used by counterfeiters, it is also more difficult for both consumers and enforcement to distinguish between real and fake goods,” said FOMCA.

The impact of counterfeit on Malaysia’s economy

Counterfeit goods are part of the shadow economy or black market, which is estimated at about RM300bil per annum, representing some 21% of the country’s gross domestic product (GDP).

The government generates revenue not only from collecting income taxes but also indirectly from excise duties where tax is imposed on consumption or on importation of goods.

Illicit trade involving smuggled goods like drugs, alcohol, cigarettes, and other fake consumer goods, bypasses such legal business channels.

Pankaj Kumar, a newspaper columnist and former Chief Investment Officer of an insurance fund  said based on the government’s tax revenue of about RM180.6bil last year against the size of the nation’s GDP of RM1,510.7bil in nominal value, the government’s effective tax collection is about 12% of nominal GDP. 

“From here, we can see that the government is losing approximately RM36bil in tax revenue alone due to these leakages,” he said.

While he felt that it was impossible to completely eradicate the black market, the impact could be reduced by at least half via implementing three key measures.

“We have required laws to address this issue. We just need to ratify relevant ones to ensure that they are updated in line with both regional and international treaties we have signed on, as we need to collectively combat this growing economic threat.

“Secondly is enforcement. We need to step up efforts to ensure effectiveness if we are truly serious about reducing illicit trade and smuggled goods.

“Finally, punishment. While the laws are there and if enforced, graft and crime watchdog bodies are calling for heavier sentences as existing penalties are not deterring others from continuing to carry out illegal acts,” Pankaj said. 

FOMCA also warned that counterfeit products can damage our nation’s reputation on the international stage.

Which legitimate businesses would want to invest in a country where they are forced to comply to local regulations, hire local talent, practice knowledge transfer and pay hefty taxes while risking their sales and profit numbers as illegal players take away their legitimate market share?


Why the demand for counterfeit or black-market products?

Price. If the price is cheaper than the original, there will always be a demand.

Illicit traders, illegal smugglers and retailers know this. If they can either import or produce fake goods such as “branded” watches, handbags, perfumes or car spare parts at much cheaper prices, the margins are attractive.

Consumer wise, there are bargain hunters who do not care about the origin of products. They just want to feel as if they have achieved a certain lifestyle status that these brands represent, at a fraction of the price of original goods.

There are also those who cannot tell the difference between fake and original goods.


Demand and supply factors that drive the black market, and prospects post Covid-19

On the demand side, Pankaj recommended advocacy.

“It is about educating the public that when they buy fake goods, they are indirectly involved in promoting crime and the growth of illegal trade. 

“Additionally, it is important to illustrate how in some cases, the formulation of fake items differs from the original and this is often detrimental to the health and safety of consumers.

“On the supply side, it is all about enforcement and cutting off access to the supply chain,” he reiterated.

Covid-19 continues to see consumer and business income plummet. As a result, demand for counterfeit or smuggled goods have increased mainly due to the cheaper price point.

This affects more daily items such as liquor and cigarettes, and less of wearables like watches or handbags which are more durable.

“If the economy enters a recession and incomes are more severely impacted, we are almost certain that demand for black market items will increase. As such, we truly require collaborative enforcement from related authorities,” said Pankaj.

Besides stepping up enforcement at the borders and co-operating with regional and international surveillance organisations, Malaysia needs increased on-ground operations to weed out smuggled or counterfeit goods. 

“For those found involved in illicit trade, authorities involved need to confiscate such items and swiftly charge the traders involved.” Pankaj added.

With supply reduced, consumers would have no choice but to go back to the legal market.

This year’s International Day against Drug Abuse and Illicit Trafficking, observed on June 26, themed “Better Knowledge for Better Care” was timely. 

It was a reminder of the need to work closely with fellow counterparts, to halt growth across the entire black market as it is dealing with transnational supply chains. 

Monies recovered could then be channelled back to government coffers to support economy recovery and public health education post Covid-19.