Thursday, May 27, 2010

Subsidy Rationalisation Lab Open Day

I attended the Open Day this morning on invitation from PEMANDU (or rather my company got invited and I was one of the truckload that got picked to go).

You can find Dato’ Sri Idris Jala’s presentation on the PEMANDU website (warning: pdf link).

Now we know where this RM74 billion figure being bandied about comes from. It includes not just officially designated subsidies, but also Petronas’ spending on the gas subsidy (which isn’t carried on the government accounts), as well as spending on education, healthcare and social services, which aren’t necessarily subsidies as the term is commonly used.

The rest of my thoughts on the subject:

  1. I think for the most part the rationalisation plan is sensible – in the political sense, though not necessarily in the economic sense. Spreading the pain over 3-5 years means less citizen anger, and gives the government time to formulate and implement a better social welfare policy – I’m not sure the mitigation proposals contained in the rationalisation plan go far enough to ensure that the subsidies that remain or newly introduced will offset the impact on the poor and lower income groups.
  2. There was a lot of general support for getting rid of consumer subsidies, especially on sugar (the stats on obesity and diabetes in the open day exhibition were truly frightening) where there were a few proposals from the floor in favour of immediate abolishment rather than phased in over 3-5 years. In this case, I think we have to take the next logical step – if sugar consumption has negative social welfare impact, then removing subsidies only partly compensates for the social costs (treatment of diabetics, healthcare for the obese and overweight). That means there’s actually a strong argument for taxing sugar as well as removing the subsidy on it.
  3. And if you buy that argument, then it goes ten-fold for petrol and other use of carbon fuels, because the environmental and social impact is so much greater. If you consume too much sugar, the costs are largely borne yourself, and partly on society through higher healthcare costs. Pollution from carbon fuel burning affects the air we all breathe, not just ourselves. That health costs are less visible, but no less powerful – check the incidence of asthma and bronchitis, not to mention lost work days from illness resulting from pollution (check this post for the basis of my argument).
  4. On the time span for rationalisation, I’m in favour of a shorter rather than a longer period. BNM apparently ran some simulations and came up with a figure of 4% in 2011-12, and back to 3% from 2013-2015 if all the proposals were implemented. To me the problem with a longer period is that you risk unanchoring inflationary expectations – i.e. people will start expecting higher inflation as a matter of course, and that means continuously higher wage demands which feed into higher inflation.  There was one proposal from the floor for the period to be shortened to 24 months – I think that strikes the right balance between spreading the pain and getting it over with as fast as possible. Five years is a long time, especially in politics, and there’s no guarantee that the political will for getting rid of subsidies will last that long. Understand that I’m not arguing against cost of living adjustments to existing wage levels – but rather a self-perpetuating cycle of price increases, which would necessitate a monetary policy response. As it is, I’m already thinking that OPR might go back to 3.5% next year, and even higher in 2012, just to mitigate higher nominal demand.
  5. There was also a lot of talk on education, although I think even the panel discussion missed some basic points. Dato’ Sri Idris mentioned that Malaysia ranks 7th in the world in spending on education per capita. If that’s the case, then the declining standards in maths and science in Malaysia suggests that money isn’t being used as effectively as it should, nor does it explain why tertiary enrollment (<30%) is so low compared to high-income economies (>60%). That’s a qualitative and quantitative issue that has to be addressed.
  6. Apart from a remark by Tan Sri Azman Mokhtar and an observation by YB Tony Pua that the fall in global oil prices meant that there is effectively no subsidy on petrol, there was little to no discussion on what to do if market prices fell below government mandated prices during the rationalisation phase – shall we go to market prices directly? Or some form of adjustment mechanism? Details here would be welcome.
  7. I’m still against the idea of providing substantive support to smallholders and small-scale fishermen. They are not productive, and no amount of technology or incentives are going to make them so. Better to provide living support (just give them cash), until the pace of development overtakes them. I know that sounds callous, but our food and agricultural production will never improve if we only look to perpetuating an existing moribund market structure that cannot survive without government support, instead of rationalising land use and capital into units that can be competitive and productive. This is of course more a political issue rather than an economic one, which is why I doubt there will be much change here.
  8. The panel discussion very nearly turned into an IPP-bashing session, and here’s hoping that there will be some movement in the direction of renegotiating the contracts.
  9. YB Tony also brought up the issue of toll highways, again. Check out his blog for details.


  1. I believe if the Govt plugs leakages (read as corruption), unnecessary submarines and war planes, trims the fat in the civil service, army, Glc's, EPF, Khazanah,PNB, Tabung Haji etc. and pork barrel politics, we would have gone a long way towards ensuring a soft landing for the eventual scaling back of subsidies.

    What rationale can the Govt really have for giving away betting licences and AP's for free to croneys (opportunity cost of $2-3 billion a years) and keeping in place the one sided toll highway, IPP, water and other PIRATISED contracts and onopolies with their auto rate increases, pass through costs and ridiculous 30 years concessions?

    All this while now passing the buck back to the Rakyat for gross economic mismanagement leading to a $362 billion national debt?

    It's criminal that Jala has fallen in with this band of thieves and their $77 million Rakyat fleeced APCO spindoctoring and scaremongering where they have lumped $50 billion of education, health and welfare expenditure with other subsidies to try and pull the wool over our eyes!!

    PM Najib and the UMNO/BN Govt should resign for this continuing fiasco!

    we are all of 1 race, the Human Race

  2. It must be an act of desperation that the government has to throw everything into the scope of subsidies in order to magnify the size of the problem with view to justifying the removal of subsidies. We already knew they would be doing this by tracing the ricocheting trajectories of the government's policies.

    Therefore if we are to follow their logic, we shouldn't be faulted for including government services as a subsidized item as well, in which case no one should denigrate the suggestion next to outsource these services to the lowest bidder from anywhere in the world.

    Pun aside, that would make economic sense since less costly government services would mean more money in the treasury to reduce the pain of desubsidization on the rakyat.....

    Back to the topic, I agree with hisham's points. My concern is whether the government is arraying anything for the middle-income urban group. They are the ones going to be hit the most when fuel-inflation ensues because they simply have no means to make more to pay for the additional costs of basic urban living.

    As an example, if petrol goes up twenty sen tomorrow, many of those who jam the highway every working day from Puchong to-and-fro Kepong/Sg Buluh will be hit on the spot. That's because there's no light-rail public transportation for them. Neither is there one over in Cheras or other commercially dense resident areas. The routes were not laid out with economic or traffic sense in mind.

    The whole urban public transportation system will be unequal to the onslaught of commuters who will have to leave their cars behind when fuel price goes up. And we are talking about just one route in one city. What about the other routes plied in dozens of other cities throughout the land?

    The only thing they will carry with them while jam-packed like sardines in the few carriages and buses is their worry how much lower will be the resale value of their vehicles now that private transport becomes a load. And they will be thinking that while remembering the loans they have to service in tandem with how much concessionaires like Gamuda and the Perak personages have already made out of them. It's a bad deal for the rakyat and an indictment of long-range planning of the leadership, not to add poor governance.

    I have been thinking of all our national issues for a long time. Over the years i have tried to find solutions that can be applied. All my fears for the people and our nation are being borne out one by one day after day. It's abysmal. The sum of all fears.

    What i think the government is trying to do now is to try and make up for years of very bad and irresponsible national planning and policy by just micromanaging macro-issues covered with double-talk, triple-data and a sheer lack of transparency.

    It feeds the rakyat bits and pieces of information while driving hollow messages towards general targets but it doesn't ask itself whether it is qualified to even do so in the first place, for if it was qualified, where did all these avoidable problems spring from and how have they taken root now?

    What are being proposed - transformation, reform and desubsidization - are too little too late. Government is bad for business, except when it picks up the pieces after facilitating the mess. What the rakyat want is to have no mess in the first place.

    So, if the government wants the private sector to drive the engine of growth, it should walk the talk. The policies must all be pro-business from now on. Everything must be done to propel the one most important thing - to create jobs and fuel business growth.

  3. 2/2

    That's the only way to help the urban middle income group save themselves who, unlike their brothers in the rural area, cannot dig the garden to plant the potato.

    The government's present approach is to tinker a bit here, a part there. It should instead open up the market, stand back and only come forward to facilitate market efficiency. As many constraints as possible should be removed. For instance, one should be able to form a plc in one day or get a permit online within two. And there should be zero tolerance of third-world practices anywhere in the kingdom of the government.

    By opening the economy completely, the effect of subsidy removal which will depress domestic investment will be mitigated by new investments from afar which should help fill the gaps.

    I know this can be unpalatable to many - but do we have any other choices right now considering the magnitude and complexity of the situation before us?

    By such an approach, the fifty percent chance of failure of the government's present strategy will be over-arched by the one hundred percent chance of success of an open market economy. Creating unlimited choices should be the only key strategy. Then the same rationale for the government's measures - market efficiency - can be achieved at greater speed. And speed is important because the world market will be more crowded with new players and we are not exactly fighting fit at the moment.

    More jobs and faster business expansion are thus the only order of the day.

    I would rather the unemployed and underemployed have a job in a new company run by a foreigner than to sit at home waiting for a pro-government organization to create one for him or her.

    The days of relevance of such organizations are over. The government or its linked bodies should not be the employer of first preference.

    Nevertheless and understandably, there will be initial teething problems with such an approach. Many will find they are unequal to the job demands for knowhow or the capital demands for business expansion. They should be given full latitude to ventilate their acrimony against the appropriate parties.

    Both knowhow and capital facilities must thus be enhanced. This is one area where government can play its role. But it must play that role without prejudice. It mustn't try to bend the market to the preferences of its policy implementers, whether they be politicians in Putrajaya or front-desk officers in charge of permits, licenses, rate of application processing.

    Going forward, this is the bottom-line. We don't have the luxury to talk about nationalism, patriotism, patronage or patochialism anymore. Those don't bring food to the table, except to the tables of those who promote them. We need to face up to the realities of globalism and the dire situation before all today. The world is going to get more complex and our peoples not only have simple minds, they also look simple. Besides being too obese to handle anything.

    Only when people have more money in their pockets from keeping more of what they earn, and more opportunities and enhanced abilities to pathway their own destinies will this country spring forward under any type of regime.

    If we look around the other success stories, yes, those were the constant focus and nothing else. Right now we seem to be reacting to big waves that we had seen from afar and reacting with small walls as if they matter.

    I consider it a privilege to read this blogger's posts. His thoughts and style are those of a true professional and a mind of the first rank.

    More, please!

  4. don,

    I'm not sure how much fat can be trimmed from GLCs - I see it first hand, and I have a lot of respect for the job done by EPF, Khazanah and PNB.

    For the government however, there's obviously a lot of savings that can be gotten from improving efficiency, but one of the preconditions for that is to raise the skill and knowledge level within the civil service, as well as generally raising the level of ethics. That will cost something, as I think one of the reasons why the Singapore service for instance does so well is because their pay levels are comparable with the private sector, which helps attract talent. So any savings we make in that area will be somewhat offset by making government service merit based, with the pay packets to match. As the saying goes, we're getting what we're paying for.

    Re: submarines, I believe the main unspoken argument here is to offset China's military (remember the Spratlys), as I can't imagine the rest of ASEAN would be that great a threat. Submarines are primarily offensive, power-projecting weapons platforms, and no good for the kind of coastal/trade route patrol role RMN was originally equipped to fulfill.

    A brace of submarines isn't a sufficient deterent however, and I'm not sure we would not have been better served by equipping a squadron of shipkilling fighter-bombers instead - blame that on inter-service rivalry.

  5. walla,

    Thank you. I'm humbled you think so, and I hope I can keep up to the standard you're looking for.

    For the middle class, one of the interesting things mentioned (by Tony Pua of all people) was that with the present fall in the crude oil price on the global markets, the level of petrol subsidy is negligible. So right now would be a good time to let that go, with fairly minor implications on household costs or political fallout.

    Having said that, I think its just a matter of time before oil bounces back up, which means people will still need to eventually deal with higher prices.

    Of course, the real biggie is still the IPPs, and if we can make progress in renegotiating those contracts, then it will go a long way towards saving real cash for the government.

    I have mixed feelings on this program - on the one hand, I think that abolishing subsidies is necessary and vital towards making Malaysia competitive. On the other hand, there's going to be a lot of pain involved in the transition, especially for those stuck in the middle i.e. not enough income to absorb price rises, and not poor enough to qualify for assistance.

    That's why I'm hoping for a wage response to higher prices - with inflation going up, there will be more pressure on companies to increase returns to labour. Incidentally, this will also give a leg up to becoming a high income economy (not that that's much of an advantage). Interest rates will also go up, but given the excess liquidity that we have, that's not a big issue, nor will it impinge much in terms of raising household costs either.

  6. A last point:

    One thing that concerned me at the open day, and something I will devote a future blog post to, is policy design. Most of the subsidies were originally put in place for altrusitic reasons, but have backfired in their effects - I'm speaking here less of consumption subsidies like petrol, but more on subsidies to agriculture and industry.

    For instance, DS Idris Jala was talking about the diesel subsidy to fisermen, where the prices were so low relative to market prices that it made more financial sense for the fishermen to sell the subsidised diesel in Thailand than to actually go fishing. That's bad policy design.

    The mitigation plan is actually not much better - the proposed solution is among others to provide cash incentives for fish landings. Two wrongs don't make a right.

    The reduced fish landings isn't just a factor of changes in global diesel market prices vis-a-vis the local subsidised price (this is a fairly recent phenomenon), but more due to the systematic overfishing of our coastal seas.

    There's a presumption here that coastal fish supply is limited by the incentive structure facing fishermen (i.e. elastic), when in fact there is a hard limit because fishing stocks have been depeleted (i.e. inelastic).

    Providing subsidies and incentives cannot overcome the fact that coastal fishing is a dying industry in the ASEAN region - we are just prolonging the pain. A better use of the money is to either help coastal fishermen to transition to deep sea fishing (there have been moves in this direction, but haphazardly and not enough), or just phase it out entirely (pay people to leave the industry).

    That's just one example of government intervention that misses the spot, and results in wastage. I can name a couple of others, and I'm sure there's a lot more. I'm wondering just how much research (and of qhat quality) actually goes into policy design at ministries.

  7. how about reading this about the same subject

  8. i was told that even Msian researchers produced great technologies to improve our agriculture industry, the government rejected the idea and stay on with the OLD one...wao...tats STUPID...n tats EGO...they dont even knw with the globalization speeding like wat, our government should speed up and be competitive, not sit there and wait for the money to drop frm rakyat's pockets and this cant feed them FOREVER. we are going bckward, not moving forward. The slogan shouting thing wont HELP, except for those businessman who printed all the SLOGANs.