In the mid of euphoria about price hike, countries are scurrying to adopt some very unpopular moves, such as abandoning oil subsidies which have been the live blood of many middle and poor groups of population. To make the matter worse, as opposition parties start to exploit and harp on the issue, the livelihood is complicated by the uncertainties imposed by the sub prime, slow export-import and domestic demand. Political parties, especially the oppositions, have been arguing themselves to political center stage and have been garnering supports during this period. This is because the welfare of the people is diminished due to the cut as many starts to cut down other consumptions to compensate the increasing portion on total income spent on oil and gas.
The two sides of the argument dwelt on current welfare and future development. On one side, the argument is that the current welfare of the people is adversely affected by the sudden and drastic cut, and on the other side is the increasing subsidies could burden future plans on development and economic growth. Both sides also supported their argument with facts and figures. I would like to take a country, which recently just cut the subsidies and results in its backlash.
The people of Malaysia is recently confronted with cut of subsidy from the price of RM1,92 to RM2,70 per liter at petrol kiosk. As public transportation has not been efficient enough to cater to everyday's needs of the people, the rise has been major concerns to the people, and the sentiment has been exploited to a very adverse effect on the current government. Many popular and pro-people arguments have been put forward and have helped to garner large followings never seen in Malaysian history since 50 years independence from British.
At the recent debate between, Mr Anwar Ibrahim and Malaysia Information Minister, Mr Shambery, Mr Anwar elaborated in length the need to reduce, gradually, the price of gas and petrol. The first stage of reduction should be in the range of 50 Malaysian cents, in other words, the price can be reduced to RM2,20 if he helms the government. Although the subsidies, can cost up to 50 billions every year ( if at the current price of RM1,92), Mr Anwar argued the reduction of 50 cents required just another 5 billion RM. The additional cost, he argued could be sourced from the many economic leakages which have been rampant in the UMNO led government.
When we dissect and analyze the argument, one can see there are two elements, the price hike and the leakages. Before we deal with each one of them, let us imagine the rarity of water in drought prone areas. “Economically, the shortage of water is not an issue in these areas!", as the shortages occurred in luxury goods such as Mercedez Benz, BMW and also diamonds. We do not face shortages of these luxury goods as high price will help allocate the goods in the market. Similarly, the price of water and oil and gas could help to allocate the limited resources to the people who need them most if the price is freed to adjust itself. After all, the across the board subsidies help more rich people than poor people as the consumption is skewed in favor of the riches.
Oil and gas cannot be treated as assets to a government as they are used to fuel the consumptions. If more oil and gas are extracted, these assets are dwindling fast, and therefore the country is becoming poorer. Too much dependence on oil to fuel the consumptions will endanger the development when the wells start to dry. Although the life cannot be ascertained for sure, the current boom greased by oil subsidies will cause economic bust or economic restructuring in the future. Many industries, Plastic, Electronic, and etc, depend very much on the oil and gas subsidies to remain competitive. The exports have helped the country to earn much of the foreign currencies. This has made the exports competitive in the international market, and made other products not competitive. Although the resource curse is not apparent in the country, the money could be used with much more benefits to the people and at the same time do not sacrifice the developments.
Besides the welfare is affected by the fuel rise, the manufacturing and construction sectors face an increasing pressure to remain competitive in the market. Many contractors who have secured a construction project, due to increasing costs, have abandoned or delayed the completion. Debts increased, production and sales slowed, and unemployment increased. Many start to blame the recent hike which they have been enjoying for these many years. In a recent released decision, government has agreed to help the small and medium industries, in other words, the oil and gas subsidies will increase. This step further aggravates the situation as inefficiencies are promoted and subsidized at the expense of consumers. These aggravations come in two ways; 1) the decision to maintain and increase the subsidies mean that inefficient and uncompetitive industries will still remain, paid by taxpayers money and 2) the price hike is not accompanied by the drop in price of other goods as the inefficient producers and manufacturers remained and subsidized.
Although effort to channel the economic leakages to subsidize oil and gas is praise worthy, the money could be better used in other areas to ensure the long term development. As Malaysia is going down hill in its competitiveness and attractiveness in doing business, the need for other more productive investments such as infrastructure, programs to improve the competitiveness of local industries, education and etc are more beneficial than maintaining the subsidies which could encourage more leakages (reselling of subsidized oil and gas , smuggling and etc) and promote incompetency in the economy.
There are many sweeteners can be offered to mass population especially when the economy and people are in dire straits. Careful investigation and analysis is vital before adopting the proposals and promises are required.
John Chng at http://economicsandpolitics.blogspot.com/