I am generally in favor of subsidy cuts in Malaysia. Yet, I hesitate to support the recent liberalization.

The economic rationale for liberalization is clear. Public discourse on this front has seen enough progress that liberalization is a popular position to take in Malaysia.

Let us recap the most commonly cited arguments.

Firstly, the subsidy program has an opportunity cost, as with all policies. If a government spends on one particular program, it necessarily means not spending money on others. Moreover, blanket consumption subsidy is probably the worst of all policies in terms of opportunity cost.

Secondly, there are better policies — cash transfer or tradable quotas for the needy are two examples — compared to outright subsidy. These alternative policies can address welfare concerns more efficiently.

Thirdly, the subsidy program has to be financed. That means taxation. While taxation is required to maintain a government, the level of taxation can be controlled to accommodate other concerns. There are various reasons why a low-tax environment is favorable. A bloated subsidy program does not help in this aspect.

Finally, together with a subsidy program, multiple suffocating supply and demand control regimes typically exist to support the program. As a result, the market becomes inflexible as more and more controls are set in place. The inflexibility causes hardship to more individuals than necessary.

The subsidy cut appeals to these arguments. If these were the only concerns, I would wholly support the liberalization exercise.

But it is not.

Two pillars form the basis for my support for liberalization. One is economic concerns. The other involves concern for freedom. Specifically, it is the idea of small government.

The weight I put on these two factors changes from time to time according to situation and the situation has changed since the last time subsidy liberalization took place. The size of subsidies and the drag these place on government finance are less of an issue today compared to a year or two ago. That convinces me to place more weight for freedom vis-à-vis economic concern, although the two concerns are not mutually exclusive most of the time.

While liberalization satisfies the economic side of the balance, the desire to see a reduction in government size is unmet.

Take the Prime Minister’s Department, for instance. Member of Parliament for Bukit Bendera Liew Chin Tong shared recently that the size of the department has more than doubled in less than a decade. The statistics regarding the size of the civil service and the government as a whole are more harrowing. All this contributes to the structural fiscal deficit that Malaysia suffers from.

The deficit caused by rocketing expenditure is an indictment of a fat old man called the government. The current government has announced its intention to reduce it, presumably by reducing government expenditure. Whether the plan will be successful is another matter altogether.

Amid the liberalization and other government initiatives that include the formation of new government-linked companies, I have a disturbing narrative at the back of my mind: Effort to free up resources is aimed at merely funding government expansion in other areas.

It is hard to predict the net effect but experience does not encourage much hope. One possible outcome is a scenario where the areas of expansion require a more active government hand compared to the one where the government retreats.

Already, government supporters are using the opportunity cost argument eagerly to justify the recent cuts. They say the government will put the money in good use. Good use or not, they are setting the ground to use the retreat as a justification to expand the other sides of government.

The opportunity cost argument is not exclusively used by government supporters. Opposition sympathizers and others do have ideas on how to spend the money. Politics may create a trade-off between economic concern and freedom in the end.

I fear that, and that fear is holding me back from supporting the recent liberalization.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on August 4 2010.

One Response to “[2235] Of hitting the brakes of subsidy liberalization”

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