I refer to the Malaysiakini report Fuel hike: 78 sen more to RM2.70 per litre .

I read with great interest the announcement of the government's proposal to reform the fuel subsidy scheme, and the resultant comments, both supportive and opposing. I am in the midst of studying the scheme on a hypothesis that such a scheme not only fails to achieve its objective, but has done more harm than good to the people of this country. However, making a claim is easy but finding the data and analysing such facts are difficult. I believe that by the time I finish this, people would have lost interest in this subject. On the other hand, I strongly feel that I should say something about this scheme. Therefore, pardon me for making some opinions without concrete evidence.

Subsidy is a scheme whereby prices of the good in question are being supported, or distorted to reflect a particular level, through payment of money or some regulatory means. Such a scheme is not a new phenomenon; the EU has the Common Agricultural Policy (CAP) and the US has a price-support programme for some of its commodities. The 'rationale' is that by subsidising such products, they would yield a lower price and therefore be more affordable to the consumers.

This is true if there is no need to pay for the scheme, or in other words, the subsidy is free of charge. However, a government needs to pay for the scheme; either to the producers, or to the distributors and sellers, or the consumers, or a combination thereof. How the government is going to pay for it? It has to come somewhere - from higher taxes, or higher inflation, or loans, or profits forgone (I'll come to this later) or a combination of these.

So, you have a lower price tag. but at the same time, you need to either pay a higher taxes, or lose some of the purchasing power of your currency (RM1 is going to purchase less amount of goods this year compared to last year) or having a higher governmental tax burden, or giving up profits that would otherwise be productively deployed by the private sector.

Something about the profit-forgone. Currently, the government relies heavily on Petronas and other government-linked non-financial companies which contribute RM62 billion to the government budget. Previous surplus from such profits amount to RM105 billion and is gradually being drawn down. (Under the Malaysian budget, these companies are consolidated as PABK - Perusahaan Awam Bukan Kewangan). Meanwhile, the subsidies amounted to around RM12.15 billion last year. The government owns these PABK companies or shares thereof, which in my opinion is not something governments in general should do; and given such an amount of revenue, there would be a big room for waste and inefficiency which would go unnoticed.

Going back to the subsidies; the net economic benefit is effectively zero, since you have to get something here and put something there. But there is a distributive effect: Do poor people really benefit from the subsidy? If it is financed through higher taxes, you'd have to examine the tax structure to determine whether there's a real distributive effect from the rich to the poor (in the case of US, it is highly persuasive that it's not - see the case of Warren Buffett!). If through higher inflation, poor people obviously suffer the most - their assets are mostly cash and deposits, not capital (eg shares in companies). If through loans, it has to be paid back sooner or later unless you declare bankruptcy (yes, even government can) and you can also refer to something call Ricardian Equivalence. If through profits forgone - is it 'right' for the government to own such means of production, to retain such profits, and to make use of it as the government sees fit? (note the arbitrariness that arises out of these actions) And not to mention that you need to hire government bureaucrats to administer those subsidy programmes, which, of course, cost time, money, and labour.

The government bureaucracy in administering such a scheme is certainly going to swell if some of the suggestions are implemented. For example, how should the government ascertain whether you pay taxes in Malaysia? Hire bureaucrats to do it. How is the government going to pay all the money to the retailers? Again, bureaucrats. Who is going to pay the bureaucrats? We the taxpayers. By such a subsidy scheme, you do not get a lower price; instead, you get an 'apparently' lower price, but you do eventually pay for it without your realising it in the form of taxes, inflation, government borrowing, profits forgone, or some of the combinations.

What should be done in order to make goods affordable? In my opinion, the single most important key is by maintaining a sound currency reflecting fully the purchasing power that derives from the industriousness and productivity of the people. In general, the economy sees prices rising and falling everyday - prices of some goods rise, some fall, but over all the 'price level' remains fairly stable - if the currency is sound. A sound currency means, albeit crudely, that the money supply per unit output is fairly stable. This is only possible when the government does not pursue a discretionary monetary policy - some examples are interest-rate targeting, inflation targeting or exchange-rate targeting.

The foreign exchange market nowadays is highly efficient, and though the rates vary day to day, they tend to reflect the purchasing power of the currency quite fully in the long run other factors being constant. Discretionary monetary policies can distort such an efficiency. For example, we often hear that our currency should be depreciated so that our exports remain competitive. However nobody mentions the other half of the statement - ‘at the expense of the purchasing power of your currency, discounting your hard work and productivity’. The other way is true for an overvalued currency.

By writing this, I do not mean to defame anyone I mentioned - the government, the bureaucrats, the people (and myself!). I believe all of us are having the best of intentions, but as Milton Friedman and Warren Buffett like to say, intentions should be measured against outcome. Some of the things might not be nice to hear, hence be politically unattractive; however it should be critically assessed and be explained to the people so that they would understand fully the options as well as their implications.