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Tuesday, April 1, 2014

THE OTHER SIDE OF SUBSIDIES

By SALLEH SAID KERUAK

Today, Prime Minister Najib Tun Razak told Parliament that gains from the ongoing subsidy rationalisation would be channelled for national development to improve the wellbeing and quality of life of the people. The gains would also be utilised for supplementary projects, particularly in Sabah and Sarawak, the Prime Minister told Parliament.

The Prime Minister explained, “When the revenue base expands, many projects, including infrastructure development, can be implemented. The government is committed to carrying on with the subsidy rationalisation to help boost the national economy.”

“The annual development allocation now stands at RM46 billion, and subsidies and incentives touched RM43 billion last year. Of course, this is inequitable. As such, it is only proper for the government to implement a sustainable subsidy rationalisation.”

This is certainly a step in the right direction but a step that the Opposition would most likely oppose. But then the Opposition will always oppose the government for the sake of opposing even when the government does the right thing. This is what Malaysians think the job of the Opposition is, to oppose the government every step of the way.

People who defend subsidies often highlight the goods or services that have been produced or the new jobs created. What they do not normally acknowledge is the benefits to society if that money had been spent in other ways. Ideally, a government would strive to structure its expenditures so as to achieve a return to society that is roughly similar for each ringgit spent.

Subsidies can easily upset this balance.

Many subsidies are defended as benefiting disadvantaged groups, or groups the politicians have us believe are disadvantaged. Some subsidies do, of course. However, even those that do benefit certain disadvantaged groups often benefit richer people or companies even more.

Let us take the rice subsidy as one example. Does it benefit the rice farmer or does it benefit the rice miller cum rice trader? For a long time now economists have argued that rice subsidies benefit the middleman rather than the producer or the consumer. Hence, although there may be some benefit to the producer or to the consumer, the middleman benefits even more.

What ends up in the pockets of the target group and what the government actually spends is extremely lopsided. Subsidies for the purchase of produce, by lowering the producer's costs, can reap benefits but only if the supply is unlimited. If the seller of the subsidised good is a monopoly, or there is a limited supply of the produce, then the subsidy will mainly enrich the middleman.

Subsidies themselves create a pool of money out of which recipients can influence the very political process that channels money to them in the first place. In many instances, subsidies redistribute wealth from a large number of contributors to a smaller number of beneficiaries.

Hence I believe the Prime Minister is correct in rationalising Malaysia’s subsidy program so that it benefits the people it is supposed to benefit and not the people who exploit the scheme.

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