Monday, May 31, 2010

Were Ministers Briefed On The Subsidy Rationalisation Proposals?

Or are they just dim? Or did I completely misunderstand the specific proposals for education?

Don’t cut subsidies for students, says deputy minister

The Government has been urged to continue with subsidies under the Higher Education Ministry’s education programmes for students from poor families.

Deputy Higher Education Minister Datuk Saifuddin Abdullah said the ministry provided education subsidies which most parents relied on to send their children for higher studies.

He said many students would not be able to pursue higher studies if the facility was to be withdrawn.

“Many parents in the rural areas whose children study at public institutions of higher learning rely on government aid and loans,” he told reporters after closing a Moh Desa Perwira programme at the National Defence University in Kampung Bangau Parit near here yesterday.

He said the loans provided by the National Higher Education Fund Corporation had helped ease the parents’ burden.

“As such, it would not be right for the Government to reduce or withdraw the education subsidy.”

Principle 2 of the Subsidy Rationalisation Plan says:

Education is a human capital investment and subsidy should continue but we must reduce wastage / abuse.

From the specific proposals:

    • Remove subsidies for foreign students
    • Re-target subsidies for poor families

What on earth is the Deputy Minister talking about? Nowhere is the Government  contemplating cutting support for poor students.


It’s even worse than I thought – apparently ministers aren’t even talking to their deputies.


  1. This is damning proof that they don't even bother to read what their own colleagues are saying by way of policy and principles. How-lah like that? Good one, bro.

  2. Jala did not communicate the message clear enough. What the Deputy Minister is saying is to allay the fears of the people. Personally I too am confused as to what Jala said because what was reported (spinned by MSM) and what is in the ppt was 2 different things. I think even Jala is confused.

    Usually on such a major point like this Jala should have said we are going to do
    Instead Jala tried to paint a picture of Malaysians being subsidized to the tune of RM 70 billion for political benefit but was roundly condemned.

    Consider the US. Over there there is something called the FHELP which is a programm to give students a Loan. The loan is securitized and the Govt guarantees the loan. Whats the diff with PTPTN - collection is poor? Yanks are exposed to the same risk but Obama does not say Uncle Sam is subsidizing the students. Btw the allocation for PTPTN is a mere RM 1 billion-ish, a pitiful number in a RM 200 b op + dev budget

  3. Short answer - No!!

    MCA too doesn't seem to know anything about it!

    So much for consensus and consultation.

    we are all of 1 race, the Human Race

  4. subsidies are basically from tax, non-tax revenues, and national wealth. they can't be from borrowed money, can they?

    my question is

    whom do we owe our national debt to?


  5. Fakhri,

    Money is fungible. So there's no reason why subsidies aren't being funded through borrowings.

    As to who we owe the national debt to, the biggest portion is actually to ourselves. Only 11.8% as at end 2009 is held by foreigners.

    By size, the biggest holders are EPF (26.6%) and banks (15.5%). EPF funds are contributors' while banks are mainly funded by customer deposits, so the first is actually owned by households (by proxy) and the latter is a claim on the banking system.

    Another 18.9% is in the form of GII rather than MGS, but this is mainly held by local banks, insurance and takaful companies. A further 10% or so is direct to households.

    That's why concerns over Malaysia going bankrupt, or government borrowing representing a tax on future generations is seriously overblown - it's left hand pay right hand in the end.

  6. hishamh,

    tq for the answer. i must say am both relief and more confuse. you are right. i was like seriously overblown that we might go bankrupt.

    however, i am more confuse.

    errmmm ... since that we are like the left hand paying the right hand ... so why must they cut the subsidies? to reduce further debts?

    i thot subsidies help growth. I am originally from kedah. We have this subsidy for paddy because the cost of farming is above the selling price. The idea of giving the subsidy is because the nation has no choice but to keep producing rice not only because rice is the national staple food but also a national security item. Should rice is out of stock, there goes our national security. Once our national security is weak, there will be chaos everywhere and no foreign investors will be coming. Forget economic growth then.

    Subsidies also are given to help Capital Investments. We talk about long term growth. Long term or short term, still, growth is growth. Cutting subsidies down on Capital Investments means we are cutting down on Human Capital Investments (Education), Infra-Structure Investments (Developments), Health and Medical and so on and so on and so on. In so many ways, all these contribute to lack of long term growth. In the end, lack of long term growth contributes to declining productivity.

    So my question is, why do they say cutting down subsidies help spur growth?

    So sorry for asking you questions. I wish economy is more like science. Is it?


  7. DS Idris Jala was scare-mongering a little bit (okay, a lot).

    There are a few reasons for cutting subsidies that come to my mind:

    1. They represent an opportunity cost i.e. would the money be better, more effectively spent elsewhere?

    2. The run up in debt has put Malaysia close to the point where investors would start to worry about default risk (60% of GDP). While I'm not worried about default per se, breaching this level would definitely raise the cost of borrowing i.e. more money spent on interest which could be spent on more productive things.

    3. Subsidies distort economic incentives, which means people might do things that aren't necesarily good for the economy. The petrol subsidy is a good case in point - we consume too much for our level of development.

    Note that the specifics of the subsidy rationalisation proposals don't contemplate cutting most of the subsidies for agriculture or education, nor are tax incentives on the table at all. Health is barely touched, apart from raising the consultation fee (it was apparently last changed in the early 1980s), and in education, the burden mainly falls on foreign students.

  8. Fakhri,

    To use your example of rice production, subsidising current production is really a band-aid and doesn't solve the underlying problem.

    Here are some simple questions:

    1. Why is the cost of production higher than the market price? How come Thailand and India can produce at a cost lower than we can?

    2. Would providing a production subsidy improve productivity so that the cost of production falls?

    3. Would providing a subsidy ensure that production increases to provide food sufficiency?

    We provide both subsidies to producers as well as cap prices on the retail side. Economic theory on this question is very clear:

    1. Production subsidies help inefficient producers stay in business, which also means that they use up more resources that could be used for producing other things efficiently (which could be used to buy rice from people who actually can produce it efficiently). The subsidy also means that these inefficent producers have no incentive to improve their productivity - why should they?

    2. Price controls at retail means that the incentive to produce on the other hand is lowered i.e. even businesses who might otherwise be efficient at producing rice, which would have the effect of lowering the market price, can find more profitable things to do.

    3. Price controls also mean that people consume more rice than other staples, relative to what the market price should have been.

    Point 1 + 2 means supply is lower. Point 3 means demand is higher. That means we die both ways - producers who are inefficient (and remain inefficient), and effectively a constant shortfall in supply because there's effectively a barrier against raising production.

    Kesimpulan: subsidy + price control = less rice, which is also more expensive.

    Agricultural subsidies worldwide (not just in Malaysia - Japan has the same issue for instance), is primarily politically motivated, and not economically sound.

  9. hishamh,

    tq for the answers. now i am less confused. i need to brush up on some terminologies though.

    tq :-)

  10. 'As to who we owe the national debt to, the biggest portion is actually to ourselves.'

    our own Gestetner UK money-printing machine!!

    ...also, impact and implications on ratings..

  11. Not quite walla, money printing is when the government owes money to itself. In this case, the main holders are either the banking system or to households directly, not the central bank.

  12. I was thinking of Valuecap, hisham.

    One cannot ignore that too many people have concluded the Valuecap episode was to use peoples' money to shore bourse-borne bleedings of the GLCs.

    Is there a mechanism which prevents feds from shifting their reds to semi-external blues? Think MAS shares, for instance.

    I don't think there is any consolation from knowing that it's just debt in one hand moved to the other. Especially when the other holds the remnant savings of the rakyat. Or what's left of it unassaulted by inflation whose control was the reason why subsidies have been embedded to such an extent that today, this moment, we are all in a quandary.

    This post is too far down for anyone to read. Just need to get something off my chest and move on.