THE first weeks of Datuk Seri Anwar Ibrahim as Prime Minister have been characterised by several statements indicating that the Government wants to speed up in the direction of targeted subsidies with the double objective of tackling the rising cost of living for those who are most in need and reducing the burden on government finances.
The most controversial decision has been the removal of energy subsidies for large enterprises and multinational companies (MNCs).
Now, while I agree with the spirit of targeted subsidies, the practical way in which they are going to be designed needs to be the result of a sound trade-off analysis (the gain must be bigger than the pain), and its implementation must be gradual.
Furthermore, any ideological tone (rich vs poor, big vs small enterprises) should be abandoned, while the proposed solution must be forward-looking, inspired by a long-term perspective.
Moving on
The subject’s complexity is heightened by the fact that the prolonged deployment of generalised subsidies has resulted in a few issues that cannot be resolved overnight:
- The creation of a dependence mentality so that there will be resistance to accept any change among those who have benefited from subsidies and are going to lose that benefit;
- Permanent distortions in several and inter-related markets so that it becomes impossible to understand what the “just price” – the one emerging from the dynamic interaction between supply and demand – is.
The guiding principle for long-term subsidy reform which brings permanent benefits for consumers should be liberalisation; the word, however, needs not be confused with privatisation: a change in ownership within a closed market is unlikely to truly deliver serious changes.
Liberalisation is a companion to freedom of choice, which is ultimately what can bring prices down, but the scenario out there is so complex that we need to decline the principle in different ways, according to the multifaceted variety of available cases.
The first case is that of goods and services provided by the government in competition with private providers (such as education and healthcare).
Several studies have demonstrated that government-owned providers are usually less efficient, hence their cost per student (or per patient) is higher than the cost encountered by private providers.
In this case, the Government should implement a plan to gradually phase out the provision of these goods and services while providing purpose-vouchers to the needy. Such a measure would not only reduce costs for the government but also empower consumers with a higher degree of freedom of choice.
Improvise
The second case regards goods and services provided by the state under a monopoly regime, such as public transportation and utilities (electricity). These are the sectors where more can and needs to be done in order to allow vibrant competition to benefit consumers with better services and lower prices.
However, in these cases, the process of liberalisation will take time, so an interim solution is required; my suggestion is for the Government to provide those goods and services at market price and then to assist the lower income brackets with purpose-vouchers calculated according to different income groups.
While the government can only work on averages and aggregates, providing purpose-vouchers rather than cash aids would allow the emergence of voucher markets, allowing for more targeted distribution of aids.
However, the final aim should remain the opening of those markets and the emergence of new suppliers: only such a solution could gradually bring about the provision of goods and services at gradually lower prices.
The case of purpose-vouchers can also be applied to the case of petrol. Where the scenario becomes thornier is when the subsidy beneficiaries are enterprises rather than individuals.
This is the most obvious example of how the provision of subsidised goods has distorted the market to the point where any possible solution is difficult and imperfect.
Here the reform can only be gradual: the government should gradually move toward market prices (for all), but this must be accompanied by a clear and implementable strategy to end monopolies; only in this way can temporary rising prices be accepted, by seeing the light at the end of the tunnel: different sources of supply, higher competition, and then declining market prices.
In conclusion, a true strategy to help the poor should be centred on liberalisation (market opening) and a higher degree of freedom of choice, with the government stepping back from its involvement in the provision of goods and services. — Dec 29, 2022
Dr Carmelo Ferlito is CEO of the Centre for Market Education.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
