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Is the Petrol Hike in Malaysia Acceptable?

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The Malaysian government recently ignited a firestorm by reducing the petrol subsidy. But as Editor Chad Merchant explains, this move was a necessary action for a country seeking to strengthen its financial future.

If you ever doubted the power and speed of social media, the evening of September 2nd should have made it clear. Following the Prime Minister’s statement that the government’s petrol subsidy would be reduced by 20 sen mere hours after the announcement – effectively equating to about an 11% price hike – news of the imminent rise exploded like wildfire on social media. Within an hour, spectacular queues were forming at petrol stations as drivers sought to fill up one last time at the RM1.90 price point.

Overlooking the dubious logic of sitting in a queue for over half an hour with the engine idling to save a total of possibly RM6 or so, the reaction was fairly predictable. Malaysians also engaged social (and traditional) media to vent their collective spleen, outraged at the move. Many couldn’t help but point out that the government waited until after the general election to roll back the subsidy, a particular sore spot since the opposition party had made promises of cheaper petrol if they prevailed at the polls.

However, amid the greater ire, I read a few comments essentially stating that even though the higher price at the pump would initially pinch their wallets, the reduction in the subsidy would ultimately be for the greater good of Malaysia. One perceptive commenter even chimed in with the observation that the media shouldn’t be referring to the move as a “price hike” – it was, in truth, a reduction in the already rather generous fuel subsidy.

So what are the likely results? For now, it’ll just be motorists noticing that it now costs a few ringgit more to fill up. In time, of course, the rising cost of gasoline will spread to everything it touches and prices will go up slightly to absorb the higher cost of transporting goods and people. As this inflation pushes the cost of living ever higher, a demand for higher wages will slowly lift income levels. In a move to buffer the rising labour costs, employers will increase the end costs of their goods and services. And so the circle of economic life goes on. So why would reducing the subsidy ever be considered a good longterm fiscal move?

Subsidies are seldom a good continuous strategy for national economies. Goods and services have opportunity costs associated with them: for gasoline, there is a specific cost involved in extracting the crude oil, refining it, getting it to your local petrol station, and paying the salaries of all the many people along the supply chain. When the government indefinitely shoulders a substantial burden of that cost, two things happen. First, they’re effectively mortgaging their future for short-term satisfaction. Citizens are of course happy to have cheaper petrol, but their nation’s debt is growing to cover the cost of that immediate gratification. The piper will be paid – one way or another. The government here seems to be recognising this reality and is responding correctly as part of an ongoing plan to reform subsidies in Malaysia. Second, subsidizing a commodity serves as a strong disincentive for people to conserve it. (In fact, subsidies are generally used to actually encourage consumption of a particular product.) If petrol is cheaper than soda, and far cheaper than milk, where is the motivation to conserve? In Malaysia, we have a number of cheap things of which we’d be better off by using less: petrol, electricity, water, and sugar come to mind. It’s probably no coincidence that Malaysia subsidizes refined sugar – hardly a product that’s essential to life or even people’s quality of living – and that it also has the highest rates of obesity and diabetes in the ASEAN region. Laudably, the government rolled back a bit of its sugar subsidy about a year ago, but bags of the sweet stuff are still much cheaper here than in poorer countries like Indonesia and the Philippines. Any subsidy resulting in commodities prices being far lower than those in neighbouring countries inevitably leads to smuggling and corruption, too. Ultimately, subsidies can hurt the very people they were initially enacted to serve. Malaysia should be commended for taking steps to reduce these subsidies. It will, in the long term, lead to a better quality of life for Malaysians.

Consider Norway as an example. This oil-producing country doesn’t subsidize its fuel prices at all; in fact, Norwegian motorists pay a staggering RM8.62 per litre for petrol, the world’s second-highest price at the pump, making that new RM2.10 price point here look downright miserly. Instead of using its oil profits to subsidize petrol, Norway uses those funds to provide for its citizens in the form of infrastructure improvements and free college education. This educated workforce ultimately results in soaring per capita incomes of almost RM950 per day, so Norwegians are able to absorb the high cost of petrol with ease, and the country features at or near the top of nearly every global quality of life/ happiness/development list.

Of course that isn’t to say that simply by eliminating subsidies, a country will rocket to the top ranks and all its citizens will enjoy fat salaries, but by reducing petrol subsidies, the Malaysian government has shown that it’s looking out for the longterm interests of the country and is taking steps to push Malaysia into the realm of fully developed, high-income nations.

 

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