Subsidies & Inefficiency

The latest official clarification paints the following picture:

1. Direct subsidies RM18.6 billion in 2009, indirect subsidies RM55.4 billion.

For the latter, there are two types:

(a) "...contract obligations, financial supports and rebates, assistance to MOF Inc companies...."

These are clearly part of the government's attempt at taking so-called "strategic stake" in various parts of the economy and may not have been that commercially feasible so that the government has to pump in lots of money to keep things up. This is the portion that needs cleaning up. Otherwise, you have incompetents running around acting like big corporate leaders when they are still wet behind their ears.

(b) "...cost-based financial assistance including emoluments for education and health."

This is part of social welfare as well as important KRAs which are fundamental to the shape of our future society. Without this, all education and healthcare will be at full cost.

Even here, there is a case for ascertaining how much of the "costs" or "subsidies" goes into paying for exorbitant capital cost of construction, and how much to real high value-added services from experts which are being enjoyed by the general public and therefore leading an improvement to the over general well being of society who, at the end of the day, are paying for those services through their taxes.

2. The country's national debt was RM234 billion, I presume last year, and this is purely the external debt of both public and private sectors. The government debt stands at RM362 billion, I presume on the latest count at some time this year, is made up of domestic debt (96%) and foreign debt (4%).

From above, the foreign debt of the government is estimated at RM14 billion which therefore means that the private sector foreign debt is RM220 billion. There should be no mystery as to the size of the foreign debt of the private sector as it captures all the GLCs as well, as a result of the earlier attempts at privatisation to solve the government deficit problem.

The government's financial situation today is a product of creative public finance policy in the past. When the public debt balance was cleaned up through privatisation which triggered a huge round of public spending unfortunately funded through short-term capital funds which on exit were then taken over by the national debt such as MOF Inc and shining entities as GLCs. These are all creative accounting exercises.

The economics is that the economy has lost its engine of growth which must always be private investments and which are now being replaced by public deficit spending.

It is probably high time that the government downsizes itself, and cut its operational and development expenditures by returning the bulk of the economy to the private sector and staying out of business. If not, we could be running an economy where the cream is harvested by the elite paid for by the general public in the generations to come through deflation and depreciation as their purchasing power diminishes over time.

Malaysia may not go the path of Greece but it could go the path of Latin American countries such as Argentina and Brazil. Fortunately for them, of years gone past, as these LA countries appear to be recovering.

The thing to do for Malaysia may not be to cut directly the subsidies per se but to strenghten governance and efficiency and to streamline our economic strategic position so that the need for subsidies is reduced resulting in a more transparent and efficient economic system.

To discuss what to do with subsidies in the context sugar, flour and cooking oil is to be pedantic.