Tackling Subsidies And Their Myriad Manifestations

By M. Bakri Musa

Idris Jala, Minister in the Prime Minister’s Department and PEMANDU CEO, has yet to convince his cabinet colleagues, in particular the Prime Minister, of the need to reduce subsidies specifically and government spending generally. He has to do that first before taking his Subsidy Rationalization Lab road show to the rest of the country.

Responding to the first “Open House,” Prime Minister Najib indicated that he would “leave it to the people to decide on whether they [the subsidies] should be maintained or abolished.” In doing so he abrogated his leadership on a critical economic issue. He is following instead of leading public opinion; a wet-finger-in-the-air type of leader.

While I do not share Idris Jala’s dire prediction of Malaysia becoming bankrupt in nine years – nations, unlike corporations and individuals, cannot do that – nonetheless the grim picture he painted is not far from the likely reality. His likening Malaysia’s future to today’s Greece may or not be valid but there are enough useful lessons from the current Greek tragedy.

Greece is not bankrupt, nor will it ever be; the Greeks are suffering because of economic mismanagement by their leaders. Subsidy for the poor or for essential goods was only a minor part of the mess. The Greeks were borrowing beyond their capacity to pay; they borrowed just to keep their bloated government afloat.

The other pertinent lesson is that even when faced with a catastrophe, people who have long enjoyed subsidies and special privileges would not readily give those up. This is true of the Greeks (the ugly mass demonstrations and strikes there attest to that) as well as others. Americans long used to generous subsidies for their home mortgages and health insurances would severely punish their leaders at election time should they dare even touch either issue. And America has a deficit much worse (twice as bad, as a percentage of GDP) than Malaysia.

As a reminder, the current global economic turmoil was triggered by the American expansion of its housing subsidy through “sub-prime mortgages.” Again, this was facilitated primarily through two government-sponsored (and thus subsidized) corporations, Freddie Mac and Fannie Mae. It was done with the best of intentions, making housing affordable to the poor.

Those factors notwithstanding, in the many deliberations on the current economic crisis, I have yet to hear an American leader or economist suggest doing away or even trimming the housing subsidy. And America does not lack for wise leaders or smart economists!

So if Idris Jala or anyone thinks that Malaysians would readily give up their subsidies, he is blind to the universal precept of human behavior. Likewise with special privileges, which after all are subsidies manifested differently; so do not expect Bumiputras to give that up easily either.

Choosing An Easy Target

Idris Jala showed the frightening and unsustainable trend of rising debt and increasing deficits. There are only two ways out: increase revenue through economic growth, and reduce spending, or more accurately, curtail expenditures that do not contribute to economic growth. As any businessman knows, you sometimes have to spend money to generate money.

I wish Idris Jala had concentrated only on those two central themes. Instead he focused on ending subsidies, specifically on petroleum and essential food items. Thus he is being portrayed as targeting the poor, and not without good reasons. That distracts him. It is easy and tempting to prey on the poor; though large in numbers they lack economic and political clout.

Of the record RM74B spent on subsidies in 2009, about 57 percent were on social services; 33, fuel and energy; 7, infrastructures; and 3, foods. As for the beneficiaries, only 2 percent were farmers, fishermen, and the poor.

Those subsidies on social services and infrastructures could be viewed as investments as they could potentially enhance our human and physical capital, and thus the nation’s productive capacity. Even here we could increase the efficiency by plugging the leakages.

Ending subsidies for foods would address only a tiny part of the problem (3 percent). Besides, the per capita consumption of such staples among the poor is comparable to or only minimally less than the rich, but the poor has to expend proportionately more of their income.

Idris purported to show that Malaysians enjoy the cheapest price in the region, with cooking oil costing only RM3.30 as compared to RM8.70 in Singapore. In making that comparison, Idris used the exchange rate instead of the purchasing power parity (ppp) or the Economist’s Big Mac Index. Had either been used, the price differential would be less impressive. I do not know whether Idris is disingenuous, trying to mislead, or being intellectually dishonest in using the exchange rate.

Idris proposes mitigating measures to help the poor. That would inevitably require massive administrative machinery, thus consuming whatever savings being generated. For the amount involved, it would be preferable as well as politically wise to leave things where there are, except for sugar. I would remove its subsidy not for economic but public health reasons. With rampant obesity and diabetes, any initiative that would lower sugar consumption would be good. Likewise I would hike taxes on alcohol, tobacco and gambling, but not high enough to stimulate a thriving contraband industry.

Petroleum however is different; its per-capita consumption among the rich is considerably higher. Consequently, its subsidy disproportionately benefits the rich. Again here Idris proposes cash rebates to motorcycle and small car owners. Another bureaucracy!

I am for ending petroleum subsidy, phased in slowly to minimize dislocations since it is such a crucial fuel literally and figuratively in a modern economy. However, instead of cash rebates I would eliminate taxes on buses, taxis and other conveyances to transport passengers. That would effectively half the price of a Proton to be used as a taxi, making it easier for owner-operators.

I would subsidize season tickets for bus and rail to ease the burden on commuters, as Canada is doing. Vancouver has a per capita income many times that of Malaysia, yet its car-ownership figure is considerably lower. Consequently the air in that city is not polluted with car exhaust, and the streets a pleasure to stroll. Singapore uses differential toll rates and efficient mass transit to discourage city driving.

Ending subsidy on petroleum would save not only money but also the environment. Focusing only on petroleum and sparing food subsidies (except sugar) would also make the exercise an easier sell. Besides, petroleum subsidy is massive, while food subsidies are small change in comparison, and evoke considerable emotional response. It is just not worth expending political capital and risking public wrath for the promised minuscule returns.

Hidden Subsidies

Idris should not stop with the obvious and massive petroleum subsidy. He should pursue other equally expensive and rapidly growing but hidden ones. They are pernicious precisely because they are not overt; the public is not apprised of the costs. There are no available figures to be put on fancy graphs and pie charts for your Power Point presentation.

One is the preferential awarding of contracts to Bumiputras. However noble the objective may be, unless we know what the added costs are, we cannot begin a cost-benefit analysis or assess the program’s efficacy. Few would quibble with the extra 5 or 10 percent to have a contract awarded to a Bumiputra in the name of social equity and correcting past inequities, but many would grumble if that figure were to balloon beyond 30 percent.

It is customary that contracts below a certain amount be awarded exclusively to Bumiputras. Even if the added costs were only 10 percent each (a very conservative estimate!), in the aggregate they would impose a considerable burden on the government. I suggest that Idris’s “lab” do a study on this.

Then there are the overt as well as hidden subsidies to the myriad GLCs. Many are perennial “corporate welfare bums,” forever hooked on government bailouts. The Malaysian corporate scene is littered with the carcasses of the likes of Bank Bumiputra. Again I challenge Idris to analyze that!

Such studies would require much thought and wise analysis; they cannot be done by posing simplistic questions via SMS.

The only difference between the recipients of cooking oil subsidy versus those preferred Bumiputra contractors and “corporate welfare bums” like Bank Bumiputra is that the former are weak while the latter, powerful.

If Idris Jala had been diligent and fearless in analyzing the twin problems of ballooning deficits and increasing spending, he would begin with the obvious and massive petroleum subsidy, then flush out the hidden subsidies represented by non-competitive bids of government contracts, and then get rid those money-losing GLCs. That would definitely make a dent on our deficit and spending problem. That would also invigorate our economy, thereby enhancing the revenue side.

He does not need a road show for that; all he has to do is convince his colleagues in the cabinet, beginning with the Prime Minister.

  1. #1 by HJ Angus on Tuesday, 1 June 2010 - 11:44 am

    The problem about subsidies is not really about the ordinary citizens.
    OK they grant us RM74bil “to feel good” while the other 90% is being squandered on projects that have ever-increasing costs like the collapsing stadiums and poisoned hospitals.
    I think the civil service is where we can save much more on a recurring basis.

  2. #2 by Bigjoe on Tuesday, 1 June 2010 - 12:23 pm

    I say forget the number crunching. Any move that puts revenue into UMNO/BN hand is about MACC, the police, judicial system. I am against giving ANY revenue to the govt before those things are fixed fundamentally. I don’t care if the govt goes bankrupt, roads and bridges are falling apart, stock market crashes, recession, riots in the streets etc.

    Given what happened at Hulu Selangor and Sibu, where basically its public corruption without any consequences, we have a broken system that is headed for collapse sooner or later. Why delay it? Anything that accelerate it in its present form the better. I believe in taking the pain up front.

    In fact, I encourage a mass movement of people not paying taxes at all. We do not give our hard earned money or entrust our national assets for politicians to buy election. If they want to buy election, let them use their own money. No taxes for buying election. No taxes for Corruption, Injustice and Crime.

  3. #3 by cseng on Tuesday, 1 June 2010 - 12:41 pm

    Looks like NR is locked in the middle and burned from both sides. His enemy within is as aggressive as opposition. Look at his 1-Malaysia, his NEM, which suppose to be the cure for the chronic illness of Malaysia and now the subsidies’ cut are facing resistance from his own policies. The decades long of Umno indoctrination of racial politics and rent seeking have rooted too deeply in our society. The curses of ‘ketuanan’ are surfacing one-by-one, it was a do or die time, to both NR and the rakyat.

    It is more toward interest-struggler between Umno elites and general rakyat. At least Idris admitted with the current leaks and subsidies we are going bankrupt by 2019. This a road-show for rakyat, and will there be any road-show to the elites? We really don’t know what we don’t know!

  4. #4 by k1980 on Tuesday, 1 June 2010 - 1:32 pm

    According to government statistics, the average household enjoyed RM12,900 in subsidies last year.

    So if and when these subsidies are removed, the average household would have to pay at least an extra RM12,900 a year in expenses.

    This works out to be approximately RM1,075 a month. Can you name an employer who is willing to increase a wage-earner’s pay by RM1,075 a month?

    So I foresee more and more children of families who are just scraping by to eat sand and dirt, as demostrated by Yogeswari’s children in Sungai Patani.

    Love live Jibby and his 1malaysia! Vote BN and you get to eat more sand and dirt to survive! Or you have to chew on your own dickie when hungry.

    The rakyat in the wildest dreams never even considered they would have to eat sand 53 years after merdeka.

  5. #5 by victimofcorruption on Tuesday, 1 June 2010 - 1:33 pm

    they are now at crossroads…
    if they abolish subsidy, they might lose their “steady subsidy of votes” in GE or BE or whatever E…
    if they continue with subsidy, PLUS their corruption-style governing, 2019 will indeed become a reality…

  6. #6 by johnnypok on Tuesday, 1 June 2010 - 4:39 pm

    Idris should quit and join the opposition, if he really has the people and the nation at heart, and before BN lose power.
    UMNO will break up into pieces, due to power-struggle, and BN/MIC/MCA/Gerakan/SUPP can announce OBITUARY.

  7. #7 by writecom on Wednesday, 2 June 2010 - 4:00 am

    He’s a good digger, it isn’t gold but a problematic ‘time bomb’. Maybe he should dig deeper into the roots and question the government where our taxpayer’s money are. Solved the corruption or misgoverning before implementing cuts in the subsidies. Sell a few national assets, just like the planes in MAS, to turn the country or MAS into a surplus.

    What about our over protected GLCs that we salvage with billions of our taxpayer’s money, are these for privatization? These GLC which are control by the UMNOputras must be the privatized ASAP before more funds are siphon out.

    Problem is that he’s turning it into politicization and the rakyat are made scapegoats. The subsidies are political mileages for BN and a coverage for robbing the government coffers by the UMNO cronies for almost 50 years.

    Will the cut in subsidies lead to less corruption, misgoverning or less goodies in the next GE?

    Looks like the lab or the minister has lots to answer before they even propose cuts in our subsidies. Make sure you have the remedy before you conduct your forensic investigation on the government coffers, we are not suckers but citizens of Malaysia.

  8. #8 by johnnypok on Wednesday, 2 June 2010 - 9:08 pm

    Get rid of the Indon and Philipinos, and offer instant citizenship to new immigrants from China and Indian, and reward them well for their hard-work and high-productivity. This move will guarantee Malaysia to become a fully developed nation within 10 years.
    The government can then remove whatever subsidies, and even inflate prices of every damn things in the country, and make Malaysia the most expensive nation in the world. Bumis no need to work, just eat free, and have unlimited amount of money to spend, everything free for them, no problem to accord them “Ketuanan” status, everyone happy, no quarrel, plenty to eat, and Malaysia = Land of Paradise = Truly Asia.

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