Tuesday, January 19, 2010

Subsidy : One rate for whole economy is better

T.K. CHUA of Kuala Lumpur wrote this in today's Star

SOMETIMES I wonder how the Malaysian market economy is being managed. I am referring to your news report “Fuel Cap” (Sunday Star, Jan 17). My issue is not on how the fuel subsidy should be managed. My issue is should we have this kind of multi-sector and multi-categorisation subsidy system in the first place.

We know for a fact the Malaysian economy has been distorted and dissected into numerous groups and sectors already. Each distortion and categorisation has created more controversy, inefficiency and avenues for corruption. How we could have managed a market economy with total disregard for basic market principles is simply beyond my comprehension.

Malaysia is one principal customs area. If there is any subsidy or taxation, the rate should be uniformly applied throughout the whole economy.

To dissect, to discriminate, and to categorise into different groups or sectors for subsidy entitlement or taxation burden could only result in more hardship, unfairness, inefficiency, arbitrage and corruption especially by those administering such schemes.

We have fleet cards, subsidies for taxies, buses and boats for fishermen. As if this is not complicated enough, now we want to dissect passenger cars into different categories. We spent hundreds of millions in subsidy on fishermen. Did the amount of fish landed really increase?

How much of the petrol and diesel were really used by fishermen to catch fish? Did the subsidised fuel really translate into lower prices of fish in the market?

How much of the fish we consume were supplied by foreign fishermen who enjoyed no subsides from us?

When a subsidy is given, we can’t guarantee complete fairness. Sure, the rich and the wealthy may have gained more from the subsidy, but they have also contributed more in the form of higher taxes?

When they buy a vehicle, the extra taxes (in the form of sales tax, excise duty, and annual road tax) they pay is probably many times more than the extra fuel subsidy they enjoy. What fairness can we extract from them further? Don’t forget they have also paid higher income taxes.

In managing a market economy, we must allow capitalism and market mechanism to work.

We may tinker a little here and there to make it less painful for some but the objective is not really to achieve complete parity or equality.

Didn’t the communists try to do that but we know the result was disastrous for everybody?

They tried to make equality their priority, but the policies made almost everybody equally poor and today communism is history.

A market economy, albeit with limited government intervention, has made people unevenly rich, which is better than making everybody poor.

To minimise distortions and to enhance efficiency, the Government must first decide whether to subsidise or not to subsidise the fuel.

If the decision is to subsidise, it is better to have just one rate for the whole economy. Multiple subsidised rates for different sectors or different groups of citizens only cause high administrative cost, profiteering, inefficiency, corruption and arbitrage.


I can't but agree with Chua's comment and arguements on subsidy and how it is managed.

The planned fuel subsidy based on mykad and car engine capacity is obiviously flawed and bound to fail especially knowing very well the capability of our enforcement agencies, level of corruption prevalent and the availability of world class, highly skilled home grown fraudsters in Malaysia

Those in high income bracket are already paying high tax rates and those luxury cars are purchased with one of the highest taxes ion the world, how fair is it that fuel subsidy is only given to those who don't pay tax and only pay considerably low tax and duties for the vehicle that they own. As it is only 15% individuals in Malaysia pay tax. The government should find out why is this the case, when based on per capia income figures, those in taxable range should have been substantially more. They should go after this group of people rather than try to figure out and mess up this multi-level subsidy plan.

Chua's questions on the effectiveness of subsidised fleet card to transporters and fishermen is valid and deserves a review. We should allow market forces to determine fish price and cost of transportation, never mind that public transportation is already subsidised in many other forms.

Looking at the Minsiters lack of clarity when replying to the questions on the subsidy plan, all points to a disastrous implemetation of the fuel subsidy plan in May, which will definitely shunned by the people, and Najib will end up like Badawi, whose popularity went down the drain when he drastically raised the fuel price.

In the end, no one will not die if we do not eat fish, especially those caught with fuel subsidy..

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