Categories
Economics

[1821] Of Minister Shahrir suggested elimination of fuel subsidy

According to Bernama:

KUALA LUMPUR, Oct 31 (Bernama) — Domestic Trade and Consumer Affairs Minister Datuk Shahrir Abdul Samad today suggested the government removed the 30 sen subsidy on fuel prices if the pump price goes below RM1.92 a litre. [Govt Should Remove 30 Sen Subsidy On Fuel Prices, Says Shahrir. Bernama. October 31 2008]

Four days ago, I suggested a similar move with the similar mechanism, i.e. removal of subsidy when the market prices fall below the current subsidized retail prices. I shamelessly quote myself:

With global crude oil prices having more than halved since it peaked at about USD150 per barrel just months ago, this is definitely one of those rare opportunities to make a permanent structural change to our economy by effectively eliminating the fuel subsidy for once and for all.

[…]

With decreasing subsidy quantum, the government could just maintain the current prices until the quantum of subsidy becomes zero. This happens when market prices equalize with the current subsidized prices. In doing so, elimination of subsidy does not require a hike in retail prices. When that happens, the government could immediately float it.

This strategy significantly reduces political opposition to the idea of subsidy removal. I suspect what was protested in the past was prices hike, not subsidy removal per se. [Of the best time to kill off the fuel subsidy. The __earthinc October 27 2008]

I also wrote in the same entry:

Unfortunately, there is little chance for this little maneuvering to see daylight. The government has already hinted for further reduction of RM0.15 by the end of this month. [Of the best time to kill off the fuel subsidy. The __earthinc October 27 2008]

I would like to take that back. There is a chance after all if the dear Minister pursues the matter with tack.

Categories
Economics Politics & government

[1817] Of the best time to kill off the fuel subsidy

With global crude oil prices having more than halved since it peaked at about USD150 per barrel just months ago, this is definitely one of those rare opportunities to make a permanent structural change to our economy by effectively eliminating the fuel subsidy for once and for all.

The growth rate of subsidy size at the current prices must be relatively small compared to months ago. Back in June, Malaysians saw retail prices for gasoline jumped by approximately 40%. Since then, somewhat in tandem with falling global prices of crude oil, the Malaysian government has decided to significantly reduce the retail prices though we have yet to see the levels seen prior to the hike in June.

Why does the current environment offer the best time to execute this?

With decreasing subsidy quantum, the government could just maintain the current prices until the quantum of subsidy becomes zero. This happens when market prices equalize with the current subsidized prices. In doing so, elimination of subsidy does not require a hike in retail prices. When that happens, the government could immediately float it.

This strategy significantly reduces political opposition to the idea of subsidy removal. I suspect what was protested in the past was prices hike, not subsidy removal per se.

So, this is the political sustainability required for economic sustainability.

Unfortunately, there is little chance for this little maneuvering to see daylight. The government has already hinted for further reduction of RM0.15 by the end of this month.[1]

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

[1] — JOHOR BARU, MALAYSIA: The petrol price may fall by up to 15 sen when it is reviewed at the end of the month. [Petrol cheaper by 15 sen?. Satiman Jamin. New Straits Times. October 26 2008]

Categories
Economics

[1797] Of good intention is not good enough

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.

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

First published by Malaysia Think Tank’s WauBebas.

Categories
Liberty Society

[1726] Of the state has only itself to blame

With bludgeoning fuel subsidy beginning to affect other more productive spending, something has to give. On June 5, the subsidy was reduced and the move is understandably unpopular to many. With higher cost of living plaguing us all, there grows a tendency to blame the state for our reduced welfare lately. The government meanwhile is frustrated at being blamed for something they have little choice in the face of a very global trend. While I sympathize with the government in this particular area, it is the government that has brought this blame game upon themselves. The Barisan Nasional government deserves to be mired in this very inconvenience political scenario.

The Barisan Nasional government over the years has created a system that causes the masses to become addicted to the state. After decades of such dependency, slowly but surely it erodes confidence in the ability of individuals to surmount challenge.

From the very beginning, the BN government embarks on various efforts to expound the requirement of the state intervention for the creation of a peaceful and unified society. We have to look no farther than affirmative action practiced in our country and the rhetoric and rationale employed in support of various interrelated policies. The possibility of individuals are able to advance himself is ignored in the public policy sphere.

As if that is not enough, the specter of May 13 has been used every now and then to back up state-sanctioned affirmative action. As the argument goes, without the state enforcing the affirmative action, there would be chaos. All that reinforces the idea of Leviathan: without a strong government, there would be a war of all against all, anarchy, etc.

And then there is what Marx called the opiate of the masses. How religion is regulated in Malaysia further suppresses confidence in self. All is placed in the hands of the gods which ironically, access to the gods is controlled by the state. God is everything and inevitably, the state is everything, leaving little space of individuals to express themselves. Anything different from what the state effectively endorses, is punished, depending on the leniency of the government of the state. The ability to be different from what the state endorses diminishes with years of indoctrination.

Even the source of self-empowerment is not spared from state intervention for the state is ever jealous of individuality. From elementary level and all the way to tertiary education, the state’s presence is there. Students in our education system are being told what to do rather than providing students with the opportunity to explore their potential. Even in colleges and universities students are forced to take up irrelevant subjects just to justify the state’s role in our society.

For individuals whom have broken free from sanctioned narratives, those whom have the courage to challenge the statist ideas in favor of individualism, they are accused of being foreign agents, foreign educated, forgetful of history and all other dismissive labels. In effect, instead of facing criticism advocating for greater individual liberty logically, the state prefers to poison the well and hushes away the neutral others from developing confidence in individuality. Nobody wants to join the “enemy”. More importantly, in doing so, the state convinces the neutral others of importance of strong and wide state roles in the society.

If all that does not create a society hopelessly reliant on the state, control mechanism on prices and supplies definitely does exactly that. Yet, a state the size of Malaysia hardly has total control over its economy, especially when the economy trades with other countries relatively freely. Trends such as increasingly expensive prices of raw materials are something beyond the control of a small relatively open economy like Malaysia.

At best, the mechanism along with the impression that the state is our only savior developed throughout history, gives the public the perception that the state has complete control over the economy. In reality, it does not. And so, when these global trends render these state controls over the economy useless, it gives the perception that the state is not doing its jobs in spite of the fact that it is not the fault of the state that the global economy is at the way it is at the moment.

With an education system which fails to provide self-empowerment, a whole social apparatuses that kill self-confidence and discourages individuality along with an economy system that creates the perception of absolute control, is it really a wonder why many within the society blame that state for failing to live up to a statist ideal?

What was convenience then for the state has not become inconvenient. So inconvenient it has been that the more statist political players have turned the tables against the statist incumbent.

Let this be a lesson to Barisan Nasional, and any other aspirants with statist outlook.

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

A version of this article was first published in The Malaysian Insider. The TMI version has the reference to Marx removed.

Categories
Economics

[1718] Of would you rather have flexible prices, Jeff, or just cheaper prices?

MP Jeff Ooi said:

Yesterday, all four petrol companies in Singapore – Shell, Exxon-Mobil, Caltex and Singapore Petroleum Company – reduced their pump prices by 4 cents a liter for petrol. Diesel price remained unchanged at S$2.033/litre.

[…]

Currently, Malaysia retails petrol at RM2.70/litre and diesel at RM2.50/litre.

[…]

Incidentally, oil prices have fallen by about 7% since hitting a record high last Thursday. Oil prices fell to US$136 per barrel on Tuesday. (See Crude Oil price chart on the top right hand corner of this blog)

Will Malaysia defy the law of gravity, that what goes up must come down, and reduce the fuel burden on Joe Public? [Petrol price down… in Singapore. Screenshots. July 10 2008]

He seems to suggest that Malaysia should lower local fuel retail prices after global crude oil prices suffered a dip. Just like Singapore. He of course failed to identify or mention that prices in Singapore are free whereas Malaysian prices are inflexible due to our fuel subsidy regime.

As Friday has proven, the dip is merely temporary and more about fluctuation and not a general trend.[1] I am wondering if he would agree to increasing the retail prices whenever the global prices are up…

Whatever the MP feel, it would definitely be interesting if we have subsidy in an ad valorem manner. Under this arrangement, local prices will fluctuate according to global prices while the subsidy is set as a percentage of the fuel prices.

Regardless the cost and benefit of maintaining a subsidy, subsidy ad valorem-styled will certainly be a more robust policy compared to the current structure. More importantly, ad valorem subsidy will allow prices to act as a signal better compared to the current Malaysian policy.

The graph below illustrates the current subsidy program with local prices fixed regardless of global prices. The blue color represents the size of subsidy while yellow represent the amount paid for fuel by consumers. It makes our model far simpler if we assume that the consumer purchase only an unit of fuel per day. This assumption is made for simplicity’s sake and nothing else.

Some rights reserved.

As you can see, the subsidy merely acts as a buffer to fix local prices. If global prices actually go below the fixed level, tax is automatically introduced. Given expensive crude oil prices and the size of current subsidy at the moment, I doubt a tax would be introduced.

This policy probably be good if there is a tendency for global prices to revert to a mean. The fixed local prices can be the mean and this will mean in the long run, the cost of running the policy is zero, at least nominally.

The graph below illustrates ad valorem subsidy with the subsidy itself assumed to be at 40%:

Some rights reserved.

As you can see, the local price is capable of going low as global price drops, unlike as shown in the fixed local price structure. Depending on the subsidy, the size of subsidy can be made lower than what it will be under the other model.

The only weakness of ad valorem subsidy is that the subsidy lives on forever as long as the rate is above 0%. Compare this with the introduction of tax in the first scenario.

Due to reasons stated earlier — concerning signaling and robustness, as long as global prices do not fall below local fixed prices — regardless of my support for total elimination of fuel subsidy, ad valorem subsidy is better than the current fuel subsidy policy practiced by Malaysia.

And there you go: a simple analysis comparing two different subsidy policies.

I have a feeling that what Jeff wants is this…

Some rights reserved.

…which is totally an unreasonable and irresponsible policy.

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

[1] NEW YORK, July 11 (UPI) — Crude oil prices eased back after setting a record above $147 per barrel on the New York Mercantile Exchange Friday. [Oil prices ease after record Friday. United Press International. July 11 2008]