Long ago as a boy so liberated from cares, I was on my way back home from school. Along the way, I saw a kitten looking so forlornly in a bush with a face so miserable as if she was in need of help. Without much thought, I took her home with the intention of nourishing her. Once home however, she refused to consume anything provided to her and went on to die only days later. Her death shattered my heart into pieces. In retrospect, she may not have required any saving. What she probably needed was her mother more than anything else. It was very likely that her mother was scouring for food somewhere, leaving the kitten temporarily behind. In most likelihood, despite my good intention, I separated the kitten from her mother and consequently, I killed her.
I am sure that my experience is not unique. How many of us had the good intention of giving up our seat in a train to someone whom seemed to be a pregnant lady only later to learn that she was not in the most embarrassing manner? How many of us began with good intention but ended up worse off?
Many of the policies aimed at enhancing welfare of the people began with good intention. As noble as it sounds, good intention is not always a good measure for a good policy.
If we are to derive only one lesson from economics, it has to be that individuals respond to incentives. Here is where the importance of price as a signal must not be understated. Any policy which does not take heed of this lesson is doomed to failure sooner or later and we have a long history of communism to prove that. The success of a policy depends on policymakers’ comprehension of that lesson.
Behind the Malaysian fuel subsidy policy stands a compassionate desire to alleviate the burden of the people. While many are swayed by this point, the policy distorts prices in the market and consequently affects behavior of producers and consumers for the worse.
In times of high prices under free market arrangement, conservation and investment in new technology as well as its widespread application should be the order of the day. In doing so, most actors would have adapted to the prevailing environment. In contrast, a subsidy policy — interventionist policy — isolates consumers and producers from the reality outside; it artificially lowers energy prices. State interference through the policy only garbles the signal that would otherwise call for a more measured consumption path. As a result, there is little need to adapt to a new reality.
For instance, a greater need for better public transportation is only immediately apparent when fuel prices are high. It makes no sense for anybody to utilize any kind of public transportation when driving a vehicle does not burn a hole in our pockets, with all else being equal. Likewise for carpooling; no amount of funky advertisements commissioned by the state could match the effectiveness of dearer fuel price in encouraging carpooling. So too goes with the need for greater fuel efficiency.
Furthermore, if one cares for the environment, the case for freer market is undeniably strong. Within the context of climate change, Malaysia has the honor of having the highest growth rate of carbon emissions in the world since the 1990 and without doubt, artificially low fuel prices made possible through state intervention has a lot to do with that. A refrain by the state from interfering in the workings of the market could go a long way in humbling our ugly but spectacular record.
Most of all, the downside this particular state intervention in the marketplace in the form of fuel subsidy policy is the weight well-intentioned electorates, bureaucrats and politicians placed on short-term gains at the expense of long term and structural improvement of our society. A freer market will recalibrate our carrot and stick model to be more forward looking instead of being one of instant gratification.
First published by Malaysia Think Tank’s WauBebas.