Tag: fuel subsidies

Categories
Economics

[1630] Of libertarian wet dream is now a government policy

Never I actually thought this would ever be implemented: cash transfer instead of in kind!

PUTRAJAYA: The government is looking at ways to channel cash to the neediest target groups should the diesel subsidy be removed.

Deputy Prime Minister Datuk Seri Najib Razak, commenting on a Domestic Trade and Consumer Affairs Ministry announcement on Thursday that the price of diesel at petrol stations would soon be set at market rates, said the government was finalising methods of issuing cash to the groups most in need of the subsidy. [Cash instead of diesel subsidy for needy groups. New Straits Times. April 26 2008]

Cash transfer is superior to subsidy simply because of one economic concept: indifference curve.

Admittedly though, this policy suffers from moral hazard problem: the cash will be used for things other than diesel. But hey, only an individual knows his indifference curve. Let him decide if he really needs the diesel. Cash improves an individual’s indifference curve more effectively than in kind subsidy.

The government’s job here, if this program is to work, is to identify those who really need the cash transfer. That would be a tough job: it is another problem known in economics as adverse selection.

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

p/s — okay, I am overreacting. This is not quite a wet dream that I claimed it to be as libertarians are not too fond of wealth redistribution policy but I was overjoyed when I read the news nonetheless. It is still a superior policy to the previous version. Any microeconomics textbook will tell you that.

I am quite happy to see movement against subsidy is growing healthily despite the result of the general election on March 8. While PKR had successfully played the populist sentiment by supporting greater fuel subsidy and PAS offering fattening welfare state alternative, it seems that all that has not been successful in stopping the implementation of more liberal economic policies.

The economy should be in the upswing soon as more rational economic policies are set in place. Even without that, I am already optimistic about the future. The worst seems to have past, minus the discount created by slight political uncertainty in Malaysia.

Categories
Economics

[1629] Of is biofuel the cause of the food crisis?

Roger Cohen at the NYT insists that biofuel is not the cause of food crisis, or at least not a major one if one wants to be accurate about magnitude, since it is still a small industry. Instead, he is convinced that what is causing it is protectionism.

Much larger trends are at work. They dwarf the still tiny biofuel industry (roughly a $40 billion annual business, or the equivalent of Exxon Mobil’s $40.6 billion profits in 2007). I refer to the rise of more than one-third of humanity in China and India, the disintegrating dollar and soaring oil prices.

[…]

What sense does it make to have a surplus of environmentally friendly Brazilian sugar-based ethanol with a yield eight times higher than U.S. corn ethanol and zero impact on food prices being kept from an American market by a tariff of 54 cents on a gallon while Iowan corn ethanol gets a subsidy?

[…]

The real scam lies in developed world protectionism and skewed subsidies, not the biofuel idea. [Bring on the Right Biofuels. Roger Cohen. NYT. April 25 2008]

Honestly, it is hard for me to say without looking at the data but I am leaning to his conclusion. Maybe, this warrants a short essay by itself.

Anyway, another go at the Doha Round, anybody?

Categories
Economics

[1628] Of hail Shahrir Samad!

KUALA LUMPUR: The restructured fuel subsidy scheme will see the removal of subsidy on diesel first.

Domestic Trade and Consumer Affairs Minister Datuk Shahrir Samad said diesel would soon be sold at the market rate at the pumps when a mechanism to deliver subsidies directly to those entitled has been decided upon. [Subsidy on diesel to go first, says Shahrir. The Star. April 25 2008]

It might be too early to celebrate but Mr. Shahrir is fast becoming my favorite minister.

Categories
Economics Politics & government

[1526] Of trade off, not affordability

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.

Categories
Economics

[1367] Of diesel subsidy removal and tradable coupons

On Tuesday, I expressed my disbelief of NST advocating for an elimination of fuel subsidy based on economic reasoning. Mainstream media controlled by UMNO is not known for its economic rationale but are only good at sucking up at anything that UMNO says. Therefore, I opined that the support is possibly due to the NST sucking up to the power that be. Today in the NST, it is revealed that the government of Malaysia is conducting a study on the effect of diesel subsidy removal.

KUALA LUMPUR: The government is studying the implications of removing the diesel subsidy, but has not decided to increase the price of petrol following rising global crude oil prices, the prime minister said.

Datuk Seri Abdullah Ahmad Badawi said while a decision had to be made on the subsidy for diesel, the needs of the poorest consumers, especially low-income fishermen, had to be considered. [Study on removal of diesel subsidy. New Straits Times. September 14 2007]

While I may be disgusted by the NST’s move, I would like to applaud the government’s intention to remove diesel subsidy. The current fuel subsidy in Malaysian is an awfully blunt tool that do more harm than good. I have suggested that the government should reduce tax instead of maintaining subsidy.

If the government wishes to eliminate the subsidy but still would like to support certain groups like fishermen, that is easily done. There is another alternative to the current fuel subsidy policy and the answer is coupons. Specifically, tradable coupons.

The government could simply distribute fuel coupons to these groups, presumedly deserving of it, and let members of the groups to either purchase diesel with the coupons or sell it for hard cold cash at any price. The distribution of coupons however does still constitute as subsidy. Yet, the beauty of this policy is that it curb smuggling of subsidized fuel: smugglers could only purchase subsidized fuel through coupons and rational coupons holders would sell it close to market prize in most cases.

What is more important is that this precise policy is designed to accurately channel specific funds to specific identified groups, instead of a blanket subsidy practiced now in Malaysia which the society at large suffers deadweight loss. A coupon based subsidy policy reduces the deadweight loss, enabling more precious resources to be invested in productive fields like education.