Monday, August 22, 2011

Reducing Cost Of Living Without Subsidies

I was pleased to hear today of the government's intention to expand the Kedai 1Malaysia chain when announcing the opening of a 3rd outlet in Pantai Dalam. The most recent opening should answer the challenge of detractors on whether such a chain is just a publicity stunt or gymic by the government or whether the attempt is a genuine effort to allow the rakyat to purchase necessities at a more affordable price.

What further impressed me with this initiative is that it is another indication of the government's serious effort to move away from having subsidies as a key component of the country's economic make-up. How so? With the Kedai 1Malaysia, given a sufficient number of stores in time such as it has pricing strength, the government will be able to influence a downward movement of the price of necessities, not through subsidies but direct pricing in the market!

Some of the theory of the above will require further elaboration of course, but for now, I would say the government is not simply determined but is actively pursuing a policy of pro-active substitution of subsidies with mechanisms to achieve the same aims; i.e. rather than keeping the cost of necessities like sugar and rice low by subsidies or direct price controls, using market mechanisms such as alternative competitive offerings to the market via the Kedai 1Malaysia.

What's particularly attractive about these non-subsidies mechanisms are that they are less distortionary and less open to abuse! For instance, the subsidies recently rescinded for certain industries, such as the deep-sea fishing sector, for the purchase of diesel, was always open to allegations of abuse, such as diesel smuggling. Allegations seemingly supported by how fish prices continue to rise despite these wealthy big-boated 'fishermen' being subsidised.

One can also reflect on how whilst price controls kept sugar prices low for many decades, it also enriched many who built monopolies around sugar and other controlled goods. A rich example would be Tan Sri Robert Kuok and his family empire, as he was dubbed the 'Sugar-King' for good reason, he made a sizable fortune from dominating the subsidised sugar business in Malaysia! It is also no mystery now then why he is no longer in the sugar business in Malaysia.

TS Robert, being a shrewd businessman, probably saw the need to remove sugar subsidies well before the good Minister of Domestic Trade, Consumer Affairs and Cooperatives, DS Ismail Sabri, successfully suppressed the once large subsidies handed out to sugar producers in Malaysia! I imagine the P&L* of all those in the Sugar business was of great interest to the Minister! And now from that success, DS Ismail is moving on to other successes.

Malaysians having been living in the honey-pot of a subsidy-nation may be a little too addicted to subsidies, but perhaps they would feel less angry about subsidies removal if they realised how many people have become filthy rich in Malaysia on the back of such subsidies. It makes one question, who really does benefit from subsidies? At least in the case of Mydin, who run the Kedai 1Malaysia, they may benefit from the program, but the rakyat don't pay for it!

*P&L - Profit & Loss Account

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