Monday, June 1, 2009

Removing consumption subsidies

Going by reports, consumption subsidies for general purpose flour, fine and coarse sugar, and standard loaf bread will cease by the end of 2009. This will enable the market forces to determine the prices of these essential goods.

At subsidised rates, the retail price for flour is RM1.35/kg, coarse sugar RM1.45/kg, fine sugar RM1.55/kg, and bread RM2.10/400g.

Without the consumption subsidy, the prices of essential items are expected to increase. The adjusted price of fluor will beRM2/kg, sugar RM2.05/kg, and bread RM2.42/400g.

This will be painful for the lower-income groups.

Food stamps or coupons are needed for lower-income groups
I expect that the government will have to introduce a more target-specific relief model, such as food stamps or coupons. There will be an administrative cost to this approach but, such cost will be nowhere near the cost of a broad-based consumption subsidy that is in place today.

This is a correct policy adjustment.

Consumption subsidies should be directed only at groups that fall below a specified income. In other words, the poorer segments of the Malaysian community.

This policy adjustment is necessary. It is not a moment too soon.

These economic moves are part and parcel of Malaysia's necessary adjustment to wean Malaysians away from the subsidy culture.

It will make Malaysia more competitive in the longer term.


walla said...

But even the poor road sweeper buys bihun-mee tambah sambal from the nasi lemak stall owner who buys the flour-filled bihun and mee from the market which gets them from the wholesaler who buys direct from the bihun and mee manufacturer who won't qualify for the subsidy coupons which means he will load the extra cost into the supply chain that ends up at the feet of the poor road sweeper.

Equally affected will be the Ramly burger seller, and the baker who supplies bread and buns for fast breakfast for everyone from the rich to the poor including school children at the canteen. And the roadside roti canai seller, and so on.

Looking at it this way, many of the poor don't make mee, bihun, sandwich bread, buns or roti canai themselves. In other words, the desubsidization may end up as the poor subsidizing those who can afford the increase.

Then there are the problems of hoarding and smuggling, adulteration and under-weighing, illegal reproduction of the coupons using the latest holographic digital color scanners, and hiking of the prices of rice, tapioca, butter and margarine, even potatoes. In short, another round of inflation.

The last one checked, coupons for gasoline were issued but only as quota to the masses. London, it was, 1939. The war, you know.

Blitzkrieg, actually.

Right now, even candles are costly. The oil hike cost that. Although the subsequent oil dip hasn't erased it. And candles are important when one can no longer afford to pay the electricity bill which has gone up.

Which is also a bother in this dark, breeze-less, heat.

There are free ways to remove heat. But kinetic energy and joint ventures are needed first.

Hazrul Nizam said...

Giving subsidy coupons is only a temporary solution. and like walla said, it is open to abuse. The main reason all the goods are so expensive in the first place is because of we foolishly continue to allow monopolies to dictate the price. If we are sincere in helping the poor (or even the middle class) cope with economic hardship, we must open up the market for these goods. If I am not mistaken, the supply of sugar in Malaysia is controlled by only two persons which means they have no incentive at all to cut costs.

hishamh said...

I have a friend who tried to make a go of supplying fresh sea food restaurants, hotels and supermarkets many years back. Even then, it was clear that there was something badly wrong with agricultural policy.

While Hazrul's point is one clear reason for our loss of food security, another is that the emphasis on manufacturing since Tun Mahathir's time meant that investment in agriculture lagged.

Worse, what investment was available was misdirected, and motivated more for political reasons (fishermen and farmers who vote) rather than economic ones (building the fishing and farming industries). Which is also where Hazrul's point comes in - the focus of past government policy has always been on the producers and the retailers, but neglecting (or turning a blind eye to) the role of the middle-men.

Consumer subsidies make this worse by reducing the price incentives to produce.

While I'm not blind to the short term pain abolishing subsidies will cause, the end result should be to increase agricultural incomes and production, assuming we can break the monopolies in wholesaleing. It's not just food by the way - fertilizers are controlled by a very select few.