Subsidy Rationalization Lab

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.

M. Bakri Musa