tradable coupon – the _

[2406] Better food stamp and the wider context

The Malaysian government may introduce what seems to be a non-tradable food stamp program to combat high food prices. The goal behind it is noble. While that is so, it must be noted there are at least two ways to improve the outcome of the program. Moreover, the issue of high food prices should be assessed more holistically.

First, tradable food stamp will likely improve recipients’ welfare more than mere non-tradable arrangement can. Tradability will widen the recipients’ choice set and give them the opportunity to smooth their consumption. Furthermore, they may not always require subsidized food. Tradable stamps will allow the recipients to exchange the stamp for other items of need or even cash. Such exchange tradable stamps will widen the welfare-improving effect of the program by implicitly covering those who are not explicitly covered by the program. Whatever the price of sale of the stamp, it is will be lower than the face value of the stamp for otherwise, the stamp will be worthless. This essentially means the uncovered purchasers of the stamps will also be subsidized.

Second and perhaps the natural expansion of the first option is a direct cash transfer. From public finance perspective, this is likely to be the most efficient solution within the restrictive goal of enhancing the welfare of specific group of individuals.

Regardless of the costs and benefits of food stamp, high food prices in general is a wider issue. The wider context is important.

One context is the fuel versus food debate. Government policy on biofuel may have inflationary effect on food prices. As reported by Reuters in March 2010, the biofuel policy was supposed to start in June 2011.

The other more pressing context is monopoly of foodstuffs in Malaysia. Exclusive monopoly and quota granted to specific entities on various foodstuffs cause the very problem that the food stamp program aims address.

There are plenty more examples demonstrating contradictory and convoluted government policy.

Perhaps the problem of high food prices is better addressed by undoing unproductive government interventions in the food market. These interventions benefit only specific parties instead of the wider public. Without these interventions and with a little bit of luck, the rationale for food stamps might disappear. More importantly, public welfare can be improved without spending too much public money.

[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.