Fuel Hike: Humane Alternatives between Politics & Economics
Almost every serious “intellectual” or “economist” I know bemoans fuel subsidies – the gist being it simply doesn’t make economic sense to subsidise fuel.
Having heard the arguments, I can lend some sympathy to this view; efficiency, after all, has always been something I’ve found sexy.
I did a brief survey of what’s been written while I was away on the topic (some entries of note: Hafiz, John, Tirath, Tony), and I hope to contribute a little with regards to bridging political and economic approaches to this problem. Allow me to stress that this is a personal (read: not party, etc) view.
Once again, unqualified as I am, I find it hard to argue against such thoroughly intelligent people who insist that long term economic prosperity is better guaranteed by eventually abolishing all subsidies. Add to that environmental arguments and such, and we have a case that is more than compelling.
All that said, I think this is a good time to explore the ‘humane’ side of humane economics – ridiculous though the term may be to some.
Although much of the economic reasonings against subsidies are perfectly sound, I think it’s important to remember that we are dealing with actual people and vividly real and debilitating financial woes here.
Beyond the economic theory, there are real Malaysians who are hit hard – hard in a way many of us fortunately enough will probably never truly understand – by this sudden and drastic fuel hike.
For some Malaysians, the hike means the difference between eating at Secret Recipie or the mamak.
But for others, it could be the difference between the mamak and rice with boiled eggs; the difference between walking a kilometer to school versus taking the bus, or of going to school at all versus helping with the family business.
One can continue to imagine more of such sad litany, but the simple truth is that Malaysians out there still live in poverty. We may be prosperous enough as a whole not to see that much of it in our sanitised, everyday lives, but they are out there – take a walk away from your regular route, and I think you’ll see it.
As we weigh the options before us, I feel it’s important to be aware of the very real suffering that innumerable Malaysians will have to endure as reprecussions of our policies.
So, if economic logic with a clear and singular voice demands that we one day eliminate fuel subsidies, then so be it – let’s move towards that direction.
I will not be easily persuaded however, that the best steps in said direction to take at all resemble what the Umno/BN administration has just done.
As of yet, I have not yet heard arguments disputing the fact that rising oil prices mean greater profits for Malaysia, a net exporter of oil (if there are any though, please feel free to enlighten me).
I personally hate all things limited, and love all things renewable. One day, as sure as the day is long, we will run out of oil. For now though, as I understand it, we’re reaping it in and enjoying unprecedented profits.
While it lasts, perhaps we can ease Malaysia off oil subsidies at a gradual pace, stretched out over time – set amounts over regular intervals.
While it lasts, perhaps we can stop being half hearted about public transport (anyone notice any ‘improvements’ since the last fuel hike?), stop subsidising loss making car industries, and most importantly, kick out a government that has probably squandered more than half of the true financial prosperity Malaysia is meant to enjoy via endemic wastage and brutally vampiric corruption.
While it lasts, can we not subsidise forays into solar, wind or other renewable energies and lead the region in industries that may be difficult now, but are unquestionably (in my mind anyway) the way of the future? It’d sure as hell beat subsidising Independent Power Producers (IPPs) tied to the Francis Yeoh’s and other cronies.
In summary, I do respect the well considered views of those who argue so passionately against oil subsidies; they make it sound inevitable, and I don’t have the wherewithall to object. I’m also perfectly fine with all the other imaginative ways many have come up with to ease the financial burden of the poor.
Nonetheless, surely there must be some middle ground with regard to petrol prices; some way we can achieve economic efficiency without wrecking the unthinkable damage to so many low income earners that this sudden fuel hike has engendered.
If so, let’s not be too harsh against those calling for a lowering of the price of petrol (at least for now) – we can support them while still sketching out a sustainable master plan.
ps- Here’s a conspiracy theory as to why fuel prices were raised here and now: so that Umno can fund its campaigns in the upcoming Umno elections! :P :)
Most economists (and I personally) agree with a lot of measures you outline; certainly given the choice between fuel subsidies and a gradual phasing out, I would opt for the latter. (And I hope PR would too.)
But I’m not entirely sure subsidising alternative energy is our best bet; I wrote an article on this a long time ago, but essentially the problem is that we don’t know whether we’ll be subsidising the most cost-effective forms of alternative energy. It’s probably wiser to tax carbon fuels (creating an incentive for people to switch to alternative energies, and thereby creating an incentive for R&D in this area); if we are worried about the impact on the poor, we can easily rebate the revenues from the carbon tax to them, making it revenue-neutral (as the DAP has in fact proposed).
But overall yes, you’re right: the fuel hike has hit us even harder than it should have because of unwarranted government meddling in taxing cars, restricting public transport expansion, etc. The sooner we can end this, the better.
Should the fuel price go up to RM 2.70 in one shot? or should the government lift the subsidies slowly…. or put out a well-planned road map over the fuel subsidies matter?
My friend said… one shot… one public outcry… two shot… two public outcry… why bother to let people demo so much? LOL~
“My friend said… one shot… one public outcry… two shot… two public outcry… why bother to let people demo so much? LOL~”
HAHA that was pretty much what Shahrir also said… personally, I dunno la… one good thing about the sudden removal was that it served as a swift kick in the balls so everyone is taking it seriously, and hopefully adjusting with a sense of haste, instead of procrastinating.
But the potential for a sudden inflationary shock is also there, as is the chance for profiteering a**holes to exploit the situation. The classic case would be a company charging a higher rate for getting on-site servicing… higher fuel price, so more expensive to send the technician right? Fair enough. Except the technician’s mileage claim cap didn’t actually increase! Big boss man gets higher profit, technician suffers the higher cost of fuel.
Over time, in an efficient market, these problems should counter-balance: the technician will just leave his company and go to a new company, right? But some times I feel the only efficient market ever to exist in Malaysia are the PC shops in lowyat plaza. But that’s why the shock of a sudden rise might prove helpful… what’s that analogy, the one about putting a frog in a pot of cold water on the stove…. ;-)
I like the idea of lump-sum payments, and a humane approach would be to distribute based on wage-levels, therefore the approach is somewhat needs-based (though not perfectly needs-based, since to be perfectly needs-based you need to know how much someone makes and how much someone needs to spend, and to me Internet is a necessity but sugar isn’t since I never use the stuff in any food or beverage, so good luck working out the math for everyone). Anyway, Tony’s method is wage-based.
Shahrir’s method is – in a sense – also good: because with his approach qualification is based on engine size, it is somewhat usage-based. If you have a bigger engine, you use more fuel. We want to discourage people from using a lot of fuel, so those with smaller engine get bonus. Making the limit 1.5L might sound good, but then you leave out a lot of family vans and SUVs. So, 2L is the limit, and you can still get RM625 to pimp your Perodua Rusa GX. But the trouble with this situation is that you get people going to the post office to pick up their RM625… driving their 1.8L Mercedes Kompressor. Soooo sometimes it doesn’t look quite right la :P
Fortunately, the price hike was so suddenly substantial that I think (I hope?) it really would get everyone to move towards fuel-efficiency; there is simply no other choice. Shahrir got that part right. What he got wrong was his “double-whammy” approach of then trying to further bias people against fuel-consumption by favoring small engines. A needs-based lump-sum policy would have been a better complement to a sudden hike in petrol price.
nat: in order to avoid sounding like a complete moron, i’ll limit my response to: lowyat? hahahaha :)
Welcome back from your trip. Really missed your up-todate and incisive postings. Keep up the good work
nat: thank you sir, very kind of you! :)
As a follow-up to the much debated issue of fuel price hikes, here is what I think about why the pain of the hikes is more painful because of policy mistakes of the past and the present. (Excerpts from http://www.jeremiahliang.blogspot.com)
In macroeconomics under the reknown Solow growth model, the standard of living in a country is dependent on the productivity of her people. And productivity is dependent on how much wealth we can generate from three things: (1) people, (2) capital and (3) land.
Until today, no economist has ever come up with the true reason for people to become economically productive. However, many economists agree about what are the right conditions or environment in which people tend to perform their best. That environment is indisputably a market-driven economy where people who work hard and smart will be duly rewarded by the market place and not by the government.
In fact, the best thing the government can do, apart from helping the underpriveleged and leveling the playing field for true competition), is to enhance the effectiveness of the market economy and ensure there is trust among employers, employees and institutions. The free market system of meritocacy is a system that is set up by Adam Smith’s invisible hand, not by the hand of any bureacrat or well-intentioned politician.
So Pakatan Rakyat’s call to revamp the NEP, eradicate corruption at its roots and enhance transparency are all economic measures that Malaysia should have done ten years ago when China and India were not as globally powerful as today (and oil prices were still low).
The free-floating of the Ringgit to a stronger value will also help the manufacturing-dependent economy to stand on its own feet. But in the world of 2008 when oil prices are US$130-140 per barrel and rising, Malaysia’s grace period of living in a sheltered castle are over.
At the end of the day, the government’s micro-managing efforts to keep interest rates low and administer fixed prices and minimum wages for the lower income groups will delay the economy’s ability to be more flexible and adjust to the tougher economic times ahead.
This is why I believe the long-run problems of economic productivity which Malaysia should have fixed when the Asian tigers of Chindia were just infants have now come to roost. The best remedy now is to have a complete change in the mindset of the people through a total reform of the NEP so that trust among the races is established and a race-based system of patronage is totally replaced by respect for hard work and true innovation.
Once this human capital issue is addressed, then other micro issues can be settled efficiently following on the same logic. However, if the government continues to debate whether English should be maintained in the teaching of Science and Maths, then it is obvious Malaysia does not even have the ability and the DNA to speak the same “language” as global players.
Thus, politicans from both sides of the House should cease their politicking and start discussing policies intelligently with a view of how to prosper this nation in the next ten to twenty years. Panic efforts to prevent a sharp economic slump through populist policies in the short-term may just bring the country back into the besieged fortress of protectionism.
In other words, short-term pain for long-term pain.
Dear Nat,
IMHO, the question is not whether removal of subsidy hurt people or not. For me personally, the question is why are we not applying better short-term ways to improve other people welfare?
There are policies better than blanket subsidy out there with the same aim of helping the poor. Cash transfer is one. Coupon is another one. EITC (John’s favorite) is another.
It is true that other policies like the IPP are as wasteful if not more but removal of those policies and removal of subsidy are not a case of mutual exclusivity. We can remove both and have better short-run policies. Remember Obama: Yes We Can (dream on Obama!)
Hi! I had bad experience flying MAS yesterday. Due to increased fuel cost, I was told at check in station that luggage limit is very strictly 20Kg (for the poor economy class me). I additional KG is RM35.00 so I had to phoned my taxi to pick up the excess baggage and keep to 20.80Kg.
Like many others, I am for fuel hike provided it is well JUSTIFED and FORUMS are conducted with Rakyat to seek views and reduce sudden impact. It is certainly not new that while Rakyat were told that it will only take place in August, the PM announced the next day that price up by 12 midnight.!! Hahaha.
Why increased price then as an after thoughts then introduce all sorts of rebate haphasadly, creating confusion to Rakyat and Government Depts. Why can’t all these be thought through carefully and manage properly before fuel hike? The Government is not sincere in looking after the interest of the Rakyat!!! Such a shame to have such leadership!!
But Nat, economics IS humane. As humane as any discipline could get. Some argue it is a soulful science. One even wrote a book with that title. What it could do is to have better public intellectuals to do some good PR job for some of the explanations and reasonings.
In the context of your post, I think a true economist (ie, not the talking heads on Bloomberg, or your local financial analysts) would be deeply misguided if ‘efficiency’ is regarded as an ultimate goal. In all reasonable considerations, efficiency is at most a proximate goal, with the ultimate goal being the wellbeing everyone. No one should really argue for efficiency just for efficiency sake. For eg, if you truly embrace and understand the purpose of central banks, the ultimate goal of all central bankers is to maintain and improve a sustainable level of living standard – inflation stability and economic growth are proximate objectives.
So when a clear headed economist argue that the fuel price increase is good, it is not because she is making a case of efficiency is more important than the rakyat. On the contrary, it is because the fuel increase is good for the rakyat ultimately. The problem is that the reason why this is good is so against intuition and conventional wisdom, that most economists making a non-apologetic case for it sound like bitches.
And now moving on to be even more specific, I disagree with phased increase in fuel price. If we agree that removal of fuel subsidy is inevitable, and that the main problem with removal of subsidy is hardship for the people due to inflation, then phased increase in price will ultimately hurt the people more, not less. And no, it is not hoarding and the sorts, but through the main determinant of inflation – inflation expectation. A one time increase limits the expectation of future inflation, but a staggered increase embeds the expectation. A phased increase in fuel price will most probably lead to much higher overall inflation than a one time increase. And when that happens, the hardship of the rakyat will be greater, not less. One can take a corollary of this argument in central banks raising interest rates, either one time or in a staggered manner. If the central bank is worried about inflation expectation (as compared to being worried about a financial market meltdown), you would expect it to raise rates over a period of time, multiple times in a staggered manner. This embeds expectation. In the reverse, if you do not want to embed expectation as in the case of raising fuel price, you should want to do it in one go. I am doing a bad job in explaning this, but Paul Krugman wrote briefly on this matter not so long ago – google “Krugman + embedded inflation”.
This doesn’t mean we should ignore those who are badly hit by this one time increase. It is just that there would be more badly hit people if it is phased. One way to alleviate the hardship of the poor is to have direct transfer to them, and the road-tax rebate does this. It is imperfect yes; no tool is perfect, but it is important that it reaches the intended target most of the time (for eg, a blanket fuel subsidy for everyone is NOT a good tool to help the poor). Yes, you can argue that it is unfair that some Beemer and Merc owners get the rebate too, but how many of these cases are there anyway, compared to the rest of the population? 5% to 95%?
But of course, more could be done. Income-based, mean tested transfer perhaps. If the Government is wise, this should be in the planning process for the next Budget.
Man, I post the longest comments on your blog, haha.
“But Nat, economics IS humane.”
Haaa… how about this. We define economics that WORKS as humane economics. Broken economics is inhumane :)
e.g. of broken/inhumane economics: the US health-care system.
Elanor hit the nail right on the head I feel… the most important thing to get right is to clearly and unambiguously determine the most appropriate goals. Efficiency per se is nice, but insufficient, since the pursuit of ultimate efficiency will take us to Robert Kuok pwning everything and the rest of us can just bugger off. Technically, that would be efficient. On the other hand, “rakyat-friendly” is too ambiguous to be useful to anyone other than an opportunistic politician.
So how about this… can we set benchmark target Gini coefficients over a few years? What are the other benchmark metrics that we may want to consider?
Hi Nat and all…
Can you kindly help to spread the word…
SIGN THE DIRECTIVE to Malaysian MPs and ADUNs to push the government to build an efficient public transportation system ASAP at http://www.petitiononline.com/BEPTS/petition.html
This is a very trying time, ONLY IN WORKING TOGETHER (political affiliations aside), we shall ALL survive. It is the Malaysians who make Malaysia. MALAYSIANS BOLEH!
Watch this video:
http://www.youtube.com/watch?v=myyWXKeBsNk
“Either we heal now as a team, or we will die as individuals. Inch by inch, play by play, till we are finished. We’re in hell right now. Believe me. And we can stay here and get the shit kicked out of us; or we can fight our way back into the light. We can climb out of hell. One inch at a time.”
TAKE THE BALL AND RUN WITH IT, MALAYSIANS.
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