Monday, May 19, 2008

Fuel subsidy - who really benefits?

Foong Wai Fong is the director of Megatrends Asia, best-selling author of ‘Megatrends Asia’ (with John Naistbitt), ‘The New Asian Way’, ‘Mr Prime Minister We Have to Talk’, and ‘Culture Is Good Business’.

He has just written for Malaysiakini an article titled Economy in jeopardy in which he pointed out in his analysis that the BN (basically UMNO) government's rather unique but predictale style of responding to various economic crises. Foong confirmed that the administration’s resolutions almost inevitably involved the spending of billions of ringgit.

Foong is being either polite or diplomatic as most Malaysians would see through their cynical eyes more sinister objectives in those multi-billion ringgit so-called 'resolutions'.

From those government 'solutions', one obtains the impression that Malaysia has very deep pockets, and that we have faith in buying our way out of our economic woes.

Foong tsk tsk-ed this approach, saying “Malaysia cannot afford this for too much longer.”

Indeed, one of our biggest earners has been our oil/gas products, which have been forecast to run out in 2014, just a frightening short 6 years away.

Basically Foong bemoaned that our leaders in reality don’t have any innovative solution to work towards ensuring our future economic well-being. Yes, our current handy cash can be used to provide temporary relief in a crisis but the strategic aim should be to invest to build capacity so as to yield recurring returns.

But our government seems only capable of throwing more money away, and in many cases, even good ones after the already-known bad ones.

Foong commented correctly that the Malaysian government spends its (currently still) plentiful money for political rather than long term economic returns.

I quote him (relevant extracts):

… the fuel subsidy of RM43 billion is three times the revenue derived from personal income tax of RM13.4 billion and over 20 percent more than the forecast corporate tax of RM34.8 billion. In total, the fuel subsidy is almost 50 percent of the estimated federal government revenue of RM102 billion.

The populist approach in Malaysia is to give out candy. It is easier for bureaucrats to do this than to think out real solutions. Unlike in business, bureaucrats spend money without demanding a return, businesses ask for a return before they disburse funds.

This view is best summed up by a foreign diplomat: “Malaysia manages its economy in the political way - talking and making slogans about things, dishing out money so all are relieved, but not asking tough questions and working hard to find solutions.”

OK, there is no doubt that the BN-UMNO economic management stinks.

Yet the government doesn’t have a monopoly on that woeful attitude. Yes, we have among us, outside the government, the ‘world’s most brilliant economist’ (mind you, he claims to have finance experience, where under his tenure, the Treasury amazingly introduced a new 2-sen, or was it 1-sen, coin - wow!).

Mr Brilliant had even flamboyantly promised us, if his party were to win the election, even lower fuel price, on top of and above what the current government is already and very painfully subsidizing.

As Foong has shockingly quantified for us above, the government’s current fuel expenditure (subsidy) is RM43 billion whilst the corresponding income is only RM 13.4 billion. Got it? Expenditure is more than 3 times the income, a state that even my old housewife mum would say "aiyoh, tua seepun loh, cheen chnea ch'arm lah". A shocking red entry in our national ledger and Mr World’s Best Economist still wants to add on to the RED.

This is an example of what Foong meant by the ‘populist approach of giving out candy’, basically making grandiose political promises which would be irresponsible and grossly damaging for sound economic management.

Furthermore this ‘world famous economic giant’ even promised to reduce the federal share of its oil/gas revenue by playing Father Christmas with a humongous 300% increase (from 5% to 20%) in oil/gas royalties for the producing States.

Take your pick – (1) he doesn’t know what he’s talking about, (2) he has been making only grandiose but unachievable promises (there’s a 3-letter word for such a 'promise'), or (3) he doesn’t care about the economic consequences so long as he realises, as a quid pro quo, his political ambition.

Would it be far amiss to say that, under those economically irresponsible and financially imprudent political promises, he’s far worse than the UMNO finance/economic ministers?

Foong said: "In the long run, subsidies kill an industry, as many developed nations have found out. Subsidies distort the real costs of production and services, and no government can afford to continuing absorbing costs over time. Besides, the subsidy lifeline only perpetuates inefficiencies."

As I mentioned in previous posts, the fuel subsidy must be removed.

The lower income group who uses small capacity vehicles such scooters and motorcycles won’t feel the impact of removing the fuel subsidies as much as those who use gas guzzlers. So why are we supporting a system which subsidizes the gas guzzlers, and which encourages cheating (Foong has politely termed this as 'inefficiencies') by big users, smuggling and the black market?

One way of compensating the low income group would be to remove, in its entirety, the road registration fees for small capacity motorcycles and scooters, and even vehicles, say those below 850 or even up to 1200 cc. The government could also look into the cost of vehicle insurance, perhaps even taking over the basic insurance - this is done successfully overseas.

And don’t forget those tolls which have been awarded ‘no-loss-&-big-profits-guaranteed’ contracts and clauses – it’s time to review them to see whether the government had abused its position in awarding those contracts to feather the nests of those towkays, and to demand re-negotiations.

In parallel to teh above remedial measures, the government needs to develop a reliable and efficient public transport system, and please for it to keep those people in the CVLB out completely.

And we certainly don't need the 'world's greatest economist' to muddle up the mess any further!


  1. have you read my blog post about "kupon subsidi"?

  2. kaytee

    it would be suicidal to raise petrol prices now as world prices of other essentials such as rice are going thru the roof. IT may creat e a ruaway inflation cause once the expectations set in, it is very difficult to reverse. no doubt, once commodity prices stabilise, then its time to gradually do away with the petrol subsidies. in return, the govt should reduce the excise duty for cars to give some form of relief to motorists as well as to reduce the personal income tax apart from your good proposal to improve public transportation.
    ah, on the tolls, you better talk to mahatir. he was the architect to impose this indirect tax for the benefit of his cronies. Dont know how the govt is going to solve this and no wonder Samy has to OSA the toll agreements. Just look at the mess over an access road under the toll road controlled by Grand Saga in Cheras.
    As for higher royalties to oil producing states, I am all for it. Hey, the federal government just has to stop the leakages, there is enough money to go round. One large investment bank from US estimated that more than$100 billion (United States dollars) have been leaked out for the past ten years thru massive corruption! Just imagine how much Patrick Badawi be richer if the PGCC has taken off and that at the expense of the people in Penang.
    As usual, you never resist the temptation to take a swipe at Anwar. You are just consistent in this. Your right, anyway and no one should take away that.

  3. aiyoh, u really cannot count-lah.
    rev from personal income tax collection is RM13+bn lah. total rev is about RM100+bn.
    nevertheless, the subsidy is about 50 per cent of revenue. so it doesn't make sense.

  4. haiyah also if u want to criticise "finance whiz kid" who read malay studies in UM, then you should point out his TEXT BOOK application of classical Keynesian theories, controlling money supply to control the economy vs classical economics, ie direct fiscal intervention.
    if only all the darn assumptions in economic theories were true in real life...

  5. what you've correctly echoed is also happening on a global scale where our current lifestyle is being subsidized by age-old petroleum. kinda like inheriting a large sum of money from your ancestors, therefore you don't have to work so hard or not work at all, until the money runs out. that would be the global energy crisis.

  6. >>>The lower income group who uses small capacity vehicles such scooters and motorcycles won’t feel the impact of removing the fuel subsidies as much as those who use gas guzzlers<<<

    How the heck does the above sounds logical? Is the writer living in a twilight zone??
    .. the petrol price hike DOES affect low incomers.. it will cause inflation!! everything will skyrocket and the poor becomes poorer!!. Get real!