We know that the expenditure on food, education, and healthcare are the
three major social spending for enhancing human development. It is quite simple
to show that these three elements are interrelated, but food seems to be dominant
in this interrelationship. Indeed, good and well balanced food is a
prerequisite for good health and better educational achievements. Accordingly,
policies and measures that prove to be efficient in providing people,
particularly the poor and vulnerable groups, with adequate and well-balanced
food are welcomed from the viewpoint of human development. To improve the
standard of living of the poor and low income groups, the government implements
direct and indirect subsidy programs. For example, in Malaysia, the essential
food items like cooking oil, sugar and flour, healthcare, education,
agriculture and fisheries, electricity, cooking gas, and the highway toll are
being subsidize by the government.
For whom is the subsidy?
In general all subsidies benefit the consumers. By and large, the purpose, of providing subsidies is either
to make the prices of certain goods and/or services fall within the ability of
consumers to pay, or to enable inefficient producers (i.e. high cost producers
like rice farmers) to continue producing rice even when the prevailing market price is less than their
costs. In this case, it is the final consumers also getting benefits from the
subsidy. The consumers get the benefits by buying rice a lower price because of
the subsidy.
The redistribution effect
of subsidies
It is widely accepted in most economies around the world that the
initial distribution of income needs to be adjusted, for the purpose of
ensuring equitable distribution. This is usually done through various income
redistribution mechanism which includes the direct cash transfer and subsidy
programs. However it is important to note that the redistribution effect is not
the same for direct cash transfer and subsidies. For example, while direct cash transfer as cash rebate of RM126 a
year for car owners less than 1,000cc and RM54 a year for owners of motorcycles
less than 250cc represent, in their totality, a redistribution of income in
favor of certain targeted beneficiaries
as identified by the government. On the other hand, the redistribution effect
of the indirect consumer subsidies such as fuel subsidy is usually shared by
all consumers of the subsidized commodities regardless of whether they are eligible
or not-eligible. Fuel subsidies are a costly approach to protecting the poor
due to substantial benefit leakage to higher income groups. For example, in the
case of the fuel subsidy in Malaysia, the benefits are enjoyed disproportionately
by high-income households, who consume a larger amount of fuel as they are more
likely to own multiple vehicles with larger engine capacities. It is estimated
that the bottom 20% of households in Malaysia only receive 4% of the fuel
subsidy, while the richest 20% receive 42% of the subsidy1. Therefore,
subsidies received by all societies regardless of their socioeconomic status
are not a suitable one to be implemented.
Subsidies and economic
efficiency
The relation between subsidies and efficiency is a controversial
issue. From the economic viewpoint, it
is usually argued that whenever subsidies interfere with the functioning of the
market price mechanism, they lead to inefficient allocation and waste of
resources. Indeed, this argument holds true for the subsidies to producer, considering
the purpose of this policy is to enable high cost or inefficient producers of
certain commodities to continue their economics activities. Although, the
argument for producer subsidies might be accepted within the context of ensuring
the sustainability of the important food
sector, such as rice and fishery
sectors, this policy should not be a permanent policy as this would bring about
negative impact in the long run.
It is quite simple to prove that direct cash transfer have no impact on the
functioning of the price system given that when the government decide to make
these transfers, it only provides additional purchasing power of targeted eligible individual
or group to enable them to buy basic commodities at the prevailing market
prices. By contrast, indirect consumer subsidies such as subsidies on food
items such as cooking oil, sugar and flour may lead to inefficiency because of
the price distortion associated with such subsidies. This argument is valid
when low priced goods are irrationally consumed and used for purposes other
than those targeted in the government subsidy scheme. For example, the consumers
from Singapore and Thailand buying these subsidized food items (cooking oil,
sugar and flour) from Malaysia. Similarly, industrial sectors such as cordial
beverage producers and bread producers also benefit from sugar and flour
subsidies. What matters in this context is the efficiency of the consumer
subsidy in itself, i.e. its efficiency as a tool of targeting low-income and
disadvantaged groups of the population.
In general Malaysia is among the major countries that implementing
subsidies policy to help reduce the cost of living of its people. In year 2013,
government expenditure on subsidies equated to nearly 16 per cent of its
operating expenditure, which is about 5.1 per cent of the total Gross Domestic
Product2. This figure also does not account for the cost of implicit
subsidies in terms of revenue foregone by public enterprises and the Government
under price controls, such as the provision of natural gas below market prices
to electricity generation companies to enable lower electricity tariffs. Ultimately,
this reduces the funds available for the Government to spend on other key
development areas that would significantly benefit the nation over the long
term, such as infrastructure, health, education and social protection3.
The authorities took vital steps to shore up fiscal management and policy in
the second half of 2013, and signaled their commitment to secure medium-term
fiscal targets in the 2014 Budget. Fiscal management and institutions were
strengthened substantially by the establishment of a high-level Fiscal Policy
Control. In addition, subsidies on fuel, electricity, and sugar are being
rationalized, and a GST has been introduced in April 20154.
How successful is the food
subsidy policy?
Three criteria are used to assess how successful is the subsidy
system in targeting the low-income people in Malaysia. Those criteria are: the level
of necessity of the subsidized commodities as consumer goods(since subsidy
should be directed to necessary commodities); the relative share of the
subsidized commodities to the overall budget of the low income
groups, since the higher is the relative share of the household budget spent on
those commodities, the more the poor are benefiting from the subsidy; and how
efficient is the subsidy system in reaching the low-income people in Malaysia.
In Malaysia, the four subsidized food commodities (flour, rice, sugar, and
cooking oil) are present in the consumption patterns of almost all socioeconomic
groups. Based on several studies conducted
using the Household, Income and
Expenditure Surveys for different years,
the findings showed that these four food items are considered necessary
commodities regardless of the socioeconomic groups and location (i.e. either
rural or urban). According to the most recent Households
Expenditure and Income Survey, households in rural areas spent around 30 per
cent of their expenditure on food, while this percentage falls to about 20 per cent
in urban areas5. In addition, the same surveys showed that the four subsidized food items are relatively more
important for the lower income group as compared to the higher one.
Based on the statistics, for the last 10 years, Malaysia
has been running a fiscal deficit, which has been growing progressively from
RM5 billion in 1998, to a record high of RM43.1 billion in 20176. The
escalating government expenditures including subsidies which do not keep pace
with the growth of government’s revenue explains this phenomenon. The dependency of the Malaysian economy on tax
revenue from petroleum production and petroleum royalty affects the ability of
the government to spend when the revenue from Petroleum declined from RM66.27
billion in 2014 to only RM43.87 billion in 2015. As to counter the problem of declining
revenue from petroleum, the government has however introduced GST. Through GST
the government was able to collect around RM34.64 billion as oppose to sales tax for the
year 2014 which was only RM17.22 billion.
Key Takeaways
A subsidy serves as an important tool to ensure social equality and help the
poor to have the chance to live a respectable
life. Nonetheless, too much allocation for subsidies may give an adverse impact
to the economy especially when the deficit is getting larger. As mentioned earlier, subsidy will create
price distortion and thus lead to inefficiency. In essence, balancing between
efficiency and equity objective is rather tricky and proper implementation and
monitoring must be put in place as to ensure that the cost of subsidy can be minimized.
As Malaysia embarked on the initiative to gradually
reduce the subsidy through the subsidy rationalization policy, it is important
for the government to properly evaluate the impact of such move. While subsidy
rationalization may improve the government’s balance sheet, the impact to the
poor and middle income group may be substantial. In summary, it is agreeable
that subsidy should not be a long term solution and selective subsidy that
targeting the poor should not be completely abolished but the improvement on
its implementation need to be carried out.
References:
1 Malaysia, Household Income and Basic
Amenities Surveys (2012), Department of Statistics, Malaysia.
2 Malaysia, Economic Planning Unit
(2016), the Malaysian Economy in Figures.
3International Monetary Fund (2013), Energy
Subsidy Reform: Lessons and Implications. https://www.imf.org/en/Publications/Books/Issues/2016/12/31/Energy-Subsidy-Reform-Lessons-and-Implications-40410.
4 International Monetary Fund (IMF)
(2014), Country Report No. 14/80.
5Fatimah, K., Masud, M. M., and
Saifullah, M. K. (2017). Subsidy
rationalization for general purpose flour: market and economics implication. Journal
of Asian Finance, Economics and Business, 4(2), 25-36.
6Malaysia, 2017 Budget, Ministry of Finance.
