May 29, 2010
Subsidy cuts will be good for Malaysia
The proposed subsidy cuts are turning out to be a political football but experts are more optimistic, saying they would boost competitiveness and appeal to foreign investors.
Dr Yeah Kim Leng, chief economist for RAM Holdings, said the long-overdue subsidy rationalisation plan had come at the right time. “The Malaysian economy has, in a way, rebounded so the implementation would not be that burdensome to the people,” he said.
“With inflation below the trend level of 3 per cent, the price impact will not exert a major concern because it will not result in runaway prices.”
He cited three major benefits of subsidy reforms, the first of which was greater efficiency gains overall.“Subsidy savings, instead of supporting consumption, can be directed to productive spending such as education, R&D, healthcare and public transportation,” he said.
The second benefit would be enhancement of the efficiency of the economy.“As we move closer to market prices, supply and demand becomes more market-responsive [and are] driven by price signals,” he said.
Yeah contended that this will allow transport services and basic food industries to be more competitive. “They will become more efficient because they will respond more efficiently to price changes,” the economist said, arguing that non-subsidised prices for goods and services will force resources to be allocated with minimum wastage.
The third and final benefit would be a more resilient economy, strengthened by lower fiscal deficit and government debt. “The lesson of the ‘Greek tragedy’ is quite stark and very relevant in our current context,” he warned.
“We will [need to] build up our fiscal bullets in order to face future shocks,” Yeah said, with the understanding that a resilient economy will be able to withstand jumps in oil prices or even a global recession.
He pointed out that the government does not have the resources at the moment to engage in counter-cyclical spending, saying that greater fiscal resilience will give it more flexibility to do so. Yeah explained that the removal of subsidies will also reduce macro-imbalances, which are of “major concern” to foreign investors. “Domestic investors will also lose confidence in the economy if debt levels build up,” he added.
“Finally, reality has set in… This will definitely have a positive and constructive effect on the economy and the future prospects of Malaysia’s socio-economic and political stability.
“The reduction of subsidies can be painful but it is necessary otherwise the economy will fail and decline.” He said subsidy reform will boost confidence in the economic management of the country and make it more appealing to foreign and domestic investors.
“These more realistic policies will encourage them to look at Malaysia’s economy as a good prospect in the long term and not only the short term.”
He added that the removal of subsidies will aid sustainable development and help maintain our standing in the IMD Competitiveness Index at a high level. Navaratnam also took the opportunity to criticise the “old NEP (New Economic Policy) mentality”, which he said was not positive or competitive enough.
“The subsidies syndrome, which is not only present in the price of commodities but right through the system, will take a heavy blow. [This will help] improve the mindset of Malaysians.”
He called the subsidy mentality a “cancer” that must be treated drastically. “If you don’t do [this] you will die in the long term… For too long we have neglected these basic problems in economic management,” he said.“That is why it is so difficult now to try and reduce what you gave so generously without good reason.”
Navaratnam also cautioned against Datuk Seri Idris Jala’s recent apocalyptic warning about the state of the country’s budget deficit, saying Idris might have exaggerated its severity.
“He has taken the situation as static when, in fact, while debt can be high, it is a proportion of the GDP that matters,” Navaratnam said.
“He has to take into account that the economy will be growing in its budget revenue and balance of payment receipts… The proportion of debt servicing to GDP need not be as dismal as he claims it out to be.”
Yesterday, the minister in the Prime Minister’s Department had warned that Malaysia risked ending up like Greece if it did not stop “living beyond our means”, noting that the country could go bankrupt by 2019 if the government continues spending on subsidies at the current rate of 12.5 per cent a year.
However, Navaratnam said: “Nevertheless, his warning is well taken and the image of Greece could well be adapted as a possible scenario if we continue with the subsidy mentality in overall economic management.”