The current direction of public debate on fuel subsidy has slightly cheesed me off. This is one of few areas that are refreshingly different from legacy issues that tread along the path of ethnicity and religion. While I am happy that an increasing number of individuals would like to see a more liberalized market, I am dissatisfied at how political leaders on both sides of the aisle — PKR and to a lesser extent UMNO — are harping at the affordability of an increased level of fuel subsidy. Really, the question surrounding the subsidy is more about trade off rather than affordability.

The ideas of trade off and affordability are interrelated but at the direction the discussion is heading, it is as if unless the resources are not utilized to support a subsidy program, the resources would sit idle. A number of people in defense of greater subsidy or in response to Deputy Prime Minister’s bankruptcy statement, have pointed out that Petronas’ bumper net profit can more than support an increased subsidy size. The truth is, the more meaningful question sounds like this: what would we be able to do with that resources apart from subsidizing fuel consumption of the poor and the wealthy alike?

In answering that question, an old adage makes absolute sense. Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a life time. Advocates of fuel subsidy program, especially those that support greater subsidy level may do well to keep the idiom in mind and to heart.

Subsidy only supports current consumption. Yes, it does have multiplier effects on the economy but one has to remember, those effects are artificial and superficial. Prices act as signals for individuals to shape their behavior accordingly. In a highly priced commodities scenario, a rational individual would seek cheaper alternatives, conserve resources or develop new ways to deal with old problems. With subsidy, prices are distorted and that steals the incentives for rational individuals to follow a more sustainable path into the future. The individuals in a distorted prices scenario would act as if there is no problem at all despite the fact that path that they are on leads to disaster.

Even if the multiplier effects are much sought after, how do the positive effects of fuel subsidy fare against the positive effect of investing the same resources into our education system, infrastructures or development of new technology that increases fuel efficiency, among others? How do the positive effects of fuel subsidy fare against policies with eyes on the future? How does a policy of giving a man a fish fare against a policy of teaching a man to fish?

The former position is irresponsible and that is especially so when there are other superior policies available to aid the poor, if that is the goal of the fuel subsidy program. Tax reduction, tradable coupons and targeted subsidy are few ideas that free up resources for developmental purposes from the mentality of here and down, of instant gratification, of myopia.

I do understand that this maneuver is a strategic political move. The call for higher subsidy level is done to garner support that the current opposition needs. In other words, it is a populist policy. It is a bad policy — how bad the policy is telling when affordability is cited as a defense; it clearly demonstrates poor understanding of a major but basic concept in economics — but popular regardless. But surely, one can be responsible and popular.

5 Responses to “[1526] Of trade off, not affordability”

  1. on 29 Jan 2008 at 22:43 mahagraha

    Your analysis sounds like a page taken from a standard economic text.

    Anyway, I like your question about the alternative uses of Petronas’ profits though.

    Perhaps I can think of some more. And I think these alternatives are both “responsible” and “popular”:

    First, more ships for the Malaysian Maritime Enforcement Agency to ensure more law and order in the seas. Yes, this is related to the “hot issue” of pendatang haram (poor them, they are always been treated that way for the increase crime rate etc, etc)

    Second, more Police in the neighbourhoods. Despite what many people think (i.e. Malaysia is a police state and all that political mud-slinging) there is a need for more police due to increasing crime-rate.

    Third, more funds for the health ministry. These funds should or can be used to build government run clinics in major population areas, esoecially in the ‘poorer’ areas. These clinics should provide an alternative to the private clinics. I think this suggestion is timely in the times of increasing fuel prices, where many households are feeling the pinch (or bite) of higher prices.

    And yes, I think that both PKR and UMNO have many more lessons to learn in economics.

  2. on 30 Jan 2008 at 12:27 moo_t

    For politikus, give away the fish is the fastest way to gain popularity.

    To teach fishing, there is a whole hell of background program, provide fish pole, baits, selling the fish to the market,etc. And the caveat : lots of works. Do you think Malaysia Boleh politikus are going to spend effort on it?

  3. on 31 Jan 2008 at 00:34 johnleemk

    I wonder why PKR can’t be more like the DAP – the DAP’s alternative budget acknowledges the wastefulness of subsidies, price controls and minimum wages, and proposes several wiser alternatives. It certainly seems to me that there are quite a few pro-market people in PKR – I guess it’s that the populists hold power in PKR while the technocrats hold power in the DAP.

  4. […] certain subsidy only makes the matter worse. Affordability has been cited as a reason too but trade-off is a far better reason to oppose subsidy. Nevertheless, both reasons call for at least a reduction of subsidy, if not […]

  5. […] any case, the issue about subsidy is never about affordability. Anwar Ibrahim made it if it […]

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