Wednesday, May 26, 2010

Subsidies, Deficit & Competitiveness

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.


Anonymous said...

Just thinking out loud here. Presumably Malaysian government go ahead with this subsidy removal and save on RM 74billion as claim. Would the money be used for stronger social programs for the people like in Europe, higher personal tax deduction, reduce national debt......? The point is, the government has not be forthcoming with the information and strategy. After all the elected government are to serve the people.

My stupid math shows 74 billion/ 25 million population = RM2 billion subsidy/person in Malaysia. Is that logical?

Charlie Cluster said...

"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."

While most Malaysians believe that monopoly is not the way promote economic growth (just look at Sime Darby) the Malaysian government seems to never learn from mistakes (just look at Asas Serba's proposal). I wonder if the government will have the balls to take responsibility when the wall crumble and bury us all...

Anti-Monopoly said...

I support your view on competition. If all toll companies are managed by one company that would be an outright monopoly! ASAS SERBA would be held responsible for all the highways which would also prove to be a monstrous task. I would prefer that the tolls be left in the hands of the government because the whole toll business is a cash cow. Tolls are also a national interest therefore it would be better if the profits were chanelled back in the interests of the public rather than to private hands. In that sense subsidies should go to public utilities and social programs that improve our living conditions. We should not allow monopolies to flourish.

walla said...

The other figure that has been reported is per capita annual subsidy of rm12,900.

Flaw of averages aside, this looks mightily like the annual income for most households in the main population segment, namely the sub-middle class.

The question then is this: if subsidies are removed, how are these households to survive when all of their incomes will have to be spent just for essentials?

Secondly, the middle income group may have thrice that average household income. But with costs of middle-class things going up all the time, they are just floating above water with both members working, or the breadwinner moon-shining.

If subsidies are removed, there will surely be additional costs and since one cannot escape fuel being one desubsidized target, there will be multiplier effects adding inflationary pressures across board including things like homes, cars, power, healthcare, education, even loan and insurance charges.

We are thus looking at the specter of even middle income groups going under if they cannot earn more in tandem. And it's impossible for them to earn more today because if they could earn more today, wouldn't they already have?

Furthermore, the other factors of a growing young cohort and an increasing old cohort will impose even more financial and work pressures on the middle layer.

And the government has not said anything on the size of the social net to be borne by the tax-paying group, and whether the GST will be introduced progressively in tandem with the removal of subsidies, or how the government intends to treat the net oil bill due in two years time, and how to pay for the increased salaries and pensionable benefits of those in the civil service whose per capita size is one of the biggest on this planet, and on whom the government has been showering largesse without equal demand for productivity and performance.

On the other hand, if the government doesn't do anything, its deficit will balloon and the debt servicing ratio will become so bad that it has to issue bonds to manage its deficits if it is at all to continue most of the social services.

At some point when it cannot fulfill all those demands, the rakyat will have to find their own solutions but in an economic regime that will be unsupported by subsidies let alone uncertain income-adding openings.

But since it takes eighteen months to grow a pineapple and at least ten years to undo the educational damage on a person, how will that be conceivable?

Furthermore, there is no quantifiable assurance the government can get enough revenue to pay off its bonds when they mature since it looks increasingly likely we will not have that high-income developed-status economy within this decade, one reason being the assumption that going from pre-NEM to NEM-targeted economy will be smooth because desubsidization effects can be ignored. But that is the very issue before us now even as the NEM is being detailed.

In other words, the government will have to keep on issuing more and more bonds just to settle maturity claims on existing ones. This sounds like something unmentionable in more salubrious circles.

walla said...


The only consolation here is that we won't become like Greece. But then again, we seem to share most of its common factors.

Someone suggested that the Greeks are facing a dire financial situation because of certain things:

bureaucracy (unnecessary rules and regulations; 25 processes to open a cafe);

bloated civil service (over ten percent of the population work in the civil service where salaries increase every year, benefits are the best in Europe and the retirement age is 62);

corruption (most corrupt in the Eurozone where under-table money has to be paid to be admitted into a public hospital, pass a driving test, enter the civil service, or renovate a home; every government project is awarded to political cronies and at inflated prices; their Athens olympics stadium costs were 500 percent more expensive than Beijing and 50 percent more expensive than Los Angeles and Sydney);

no transparency in governance (economic data were falsified to paint a rosy picture over the rot);

tax evasion (only 37% out of 80% pay tax into the state coffers);

unabated borrowings (borrowing more and more to cover increasing exposures);

lacking political will for real reforms (five years too late);

laid-back attitude (their only industry is tourism).

And now the government wants the views of the rakyat on removal of subsidies. But again, how are the rakyat to comment intelligently if they do not have all the facts or have them accurately?

Since it is also inconceivable the government wouldn't have thought of that, they did, and thus the exercise is just going through the motions. The flip-side is they didn't which therefore shows the quality of their thought processes. Conclusion, both cases, bad.

But then that's hardly surprising considering the situation before all on the matter of the government-linked corporations.

Such as Sime whose bleeding at the hands of what were expected to be the best of all management of government-anointed entities will certainly empty the national blood bank. Both figures and performance are therefore anemic.

Which comes to our new ranking as number ten in the world competitiveness index.

One would think if a country has such a ranking, its peoples shouldn't have to discuss such matters. Things would have been so hunky-dory they would be busy chasing dreams of real prosperity, making heartier domestic investments for the future of the growing population, engaged in all manners of happy lifestyle activities, printable or otherwise, and generally getting a tingling feeling on the toes, not that itch to pack and leave.

In reality, sclerosis and stupefaction at the surreal state of the State is what is before us right now. Take a tour and open both eyes beyond the tromboning twirty triumphs.

semuanya OK kot said...

It was not the IMF rules that took out Suharto. It was decades of bloodsucking by him and his ilk. Remember the clove monopoly given to his son that triggered protests, as a small example. Here, with our Rice Board sold to cronies and imports of rice controlled, we are seriously being asked to give up food subsidies.

The bells are tolling. They are louder after Greece. People can sacrifice a lot if the purpose is genuine. Remember the sacrifices of British and Russians in WW2, tightening their belts and working like slaves to defeat the Great Satan of that time. Today's enemy is more subtle, holds the high moral ground and has international links.

Anonymous said...

Hi Etheorist,

‘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.’

Hit the nail on the head!

The current ranting going on around the blogs can hardly distinguish the differences of transfer payment /subsidies. The blurriness of these two fiscal payments within Jala’s report doesn’t help much either.

Idris Jala is a messenger who caries the bad news, not surprisingly many r calling for his blood. Behold the bad news carrier, thou is not been helpful for been in the ‘NON’-category of the nation. At most, those in the same boat r being labeled a traitor!

‘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.’

Can this statement be honestly been carry through in the current environment. Before those figures r been dissected & analysed by the knowns, many of the goons r readily calling for more tongkat!

So, perhaps the best solution is to let the country go bankrupt. Let the masses taste the pain of electing a government, based purely on racialist tongkat/rentseeking/leakages. Then hopefully some lesion will be learnt!