The current talk is that the money from subsidies can be used for development spending. This thinking is flawed.
The original intention of the subsidies in Malaysia was to contain consumer inflation.
When it was argued that government policies were expansionary, such as through reckless government spending on mega projects and when the money supply was growing at 20 to 30 per cent per annum, and therefore leading to inflation, the political wisdom of the day was simply to control consumer prices. Once held in check, everyone was happy. The consumers were happy and the elite of the day made hay while the sun shone.
Now, the problem is a blossoming of the amount spent on subsidies of all kinds across the board in the economy, and the amount spent on all kinds of government projects. There is now a problem in the economic system that we have inherited.
The natural instinct is to remove the subsidies. My immediate response is "Learn from Suharto" who had to resign when the people revolted at the subsidy removal insisted by the IMF.
If the purpose of removing the subsidies is to fund the deficit spending of the government, then my answer is not to do it. If the government spending is supposed to be good for the people, the subsidies are good for the common people.
The only valid reason for removing the subsidies is to enhance the competitiveness of the economy. This means that no sector of the economy is given undue advantage with the benefit of government money. In this case, the biggest subsidy is in the motor car industry where the duties on imported cars are so exhorbitant so as to drastically reduce the purchasing power of the common people. By removing the import tariff on imported cars, the transport system in Malaysia may improve dramatically. There will be no poorly made cars on the road. But there will also be a loss of revenue to the government.
The removal of food subsidies, as I have said above, is a dicey thing to do. Sure there will be an increase in retail food prices, but one off. It will reduce the quantity consumed but for a while. If the food items are produced locally, production may be stimulated and the competition reduce the price eventually. If the food items are imported, there is a need to remove the import quota so that competition will reduce the price eventually as well. On the whole, a good thing to do but gradually.
In removing subsidies to remove distortions in the economy and enhance competitiveness, the ultimate trick is to provide a level playing field with minimal or no monopolistic elements (no tariff, no quota) so that our best may compete with the best in the world.
The concept of competitiveness is derived from the concept of individual freedom and individual hard work, and against the concept of toll collection and rent seeking. Only that there should be rules so that all have equal access to opportunities in the economy and out.