[1684] Of we must face economic reality

After years of plugging a pinky into a hole of an imperfect dike, the rising tide behind it has grown sufficiently large that the dike can no longer withstand the pressure on the other side. The dike was not supposed to be there in the first place and now reality looms. In reaction to the recent removal of fuel subsidy, already there are voices on the street blaming the Abdullah administration of mismanaging the economy. This is a most unfair assessment. On the contrary, the subsidy reduction will benefit our society in the long run.

This accusation has history that goes well past June 5. Higher cost of living was one of the reasons cited why the Barisan Nasional lost significant votes to the Pakatan Rakyat candidates on March 8. In convincing voters to vote for the Pakatan candidates, Anwar Ibrahim had proposed to reduce retail prices of fuel to a level seen in 1990s.

Despite rhetoric, I absolutely doubt a Pakatan government could increase the size of fuel subsidy without hurting the economy in times when real crude oil prices are at record levels. In short, Pakatan’s argument against any kind of subsidy reduction is grounded on populism and not economic reality.

Malaysians so far have been lucky, from a certain point of view, that we are shielded from the harsh reality outside. That shield of subsidy, however, is costly and is definitely an inferior way of spending precious resources.

Instead of artificially fuelling consumption, these resources could be better spent to build capabilities, especially in education and research. More efforts need to be channeled to areas which could structurally improve the economy. A subsidy does nothing of this and it in fact only delays the inevitable march to move beyond petroleum at a very costly manner.

While lucky, I do not think we are learning from the past. We have been at this juncture before and there are lessons to be learned. In the 1970s and the early 1980s, high crude oil prices encouraged greater fuel efficiency. As demand fell with respect to supply due to increased awareness and requirement for conservation, prices dropped significantly and continued to stay low until around 2003.

I am confident that with the right policies in place, the structural changes that brought upon low energy prices in the past can happen again. The key phrase here is the right policies and one of such policies is elimination of the fuel subsidy.

The subsidy we have been enjoying masks the actual cost of consumption and the associated problems like pollution and over-consumption.

With everything masked, it is really hard to rectify any problem in the economy. It is like a noisy generator placed behind a blast door, operating at its breaking point where we do not have to hear the insufferable noise it produced. Despite the state of the generator, it continues to deliver power to us and it gives the perception that everything is fine and dandy when in fact, it is not.

We get the benefit but we are not paying for the cost. Thus, there is a grave disconnect in our cost and benefit model. By the time we find out that something is wrong, it would already be too late to do anything. A subsidy is that blast door and it prevents a signal of impending disaster from reaching us.

Truth be told, Malaysia is not the only country phasing out its fuel subsidy policy. Indonesia is on the same path as Malaysia’s while India and Taiwan are another two. It cannot be that all four different countries conspire to make the life of its own citizens harder. It cannot be that all four different countries are mismanaging their economy. The truth is that a lot of governments in the world are realizing the cost of fuel subsidy regime.

One argument puts forth that since Malaysia is an oil producer country, we should not be paying astronomical retail fuel prices. A tempting point but it fails to grasp the idea of trade-off. Pray tell, with fuel prices much higher, should we consume the fuel as if it is dirt cheap, or sell it to the world market and buy more education, more infrastructure that offer some guarantees of actual economic growth and if we could, buy a more sustainable economy?

The rise of fuel prices is a global phenomenon and the Abdullah administration has no power to dictate world prices. Whether we believe it or not, governments around the world are at the mercy of the invisible hand.

Blaming the Abdullah administration as the cause of higher fuel prices ignores the reality out there. An honest person is not interested in finding scapegoat but rather, is more interested in searching for the best policy fit given the current world scenario.

Higher global fuel prices require the structural transformation of our economy and the first step in transforming the economy is by accepting the fact that crude oil is no longer as cheap as it was in the early 1990s.

A continual upholding of subsidy policy delays the inevitable transformation required and the sooner we realize this, the better will we be prepared for the future. It is time for us to take the bull by its horn rather than sweeping the dust under the carpet by continuing to adopt a policy burdened with a huge deadweight loss, as if the world has not changed.

In Malaysia, there is always a cynical saying about how we have first world infrastructure but third world mentality. Well, this crisis is a great opportunity for us to ditch third world policy for a first world and superior policy.

Besides, the Malaysian government is running on a budget deficit. That means you and I and a lot of Malaysians out there owe somebody money. We should be thinking on how to repay these debts.

By supporting fuel subsidy, however, we are basically swiping our credit cards liberally to finance our expenditure on food, fuel and none on investment for the future. How are we going to pay for these debts if we keep spending our resources so recklessly? Do we pass these debts to our children?

I vehemently say no. We are certainly more responsible than that. We must be more responsible than that.

p/s — a version of this article was first published in The Malaysian Insider.