Oil subsidy cut and the role of government
Prime minister Abdullah Badawi had just made the much anticipated announcement of today. Petrol will increase by 78 sen to RM2.70, effective midnight which according to media reports to mitigate oil subsidy burden. Expect news on price increase in all other goods and services looming in the coming weeks.
Photo by Mohd Fahmi on Flickr
This year I will finally experience oil price increase that would directly affect me. Thinking about it makes me crazy. Among other things, I keep on worrying whether my favourite ice cream at Ikea would remain at RM1? It is definitely a bold move by the government, albeit very late, to announce such unpopular move at this moment of political awakening. It obviously shows that the government got caught in ‘now or never’ situation. Oil is like religion in Malaysia, everybody is emotionally passionate about it.
The mechanism to support the price increase by right should work very well. It would first and foremost encourage users of motor vehicles to reduce fuel consumption. Fuel subsidy given discriminatively to those using small car and motorcycles which make perfect sense because these type of vehicles are more fuel efficient. (It should not, however, be a presumption that the subsidy would “rightly” reach the lower income group since higher income group can buy small car and motorcycles, too.) Fuel subsidy are given in the form of rebate instead of a supplemental to the price at consumer level.
When learning economics, I always interested to find out how changes in policies, which are supposedly made to address problems, can backfire. One common mistake policymakers tend to commit is not explaining what they are doing.
How do you think the majority of Malaysians would react to the price hike? To them, price increase would only mean that they need to fork out more money for petrol, instead of reducing fuel consumption and despite the subsidy through rebates. Whoever they are, they would transfer their economic burden to whoever that pay their income (i.e. employees would ask for higher salary from employers, suppliers would charge buyers higher price) and the problem would eventually spiral. In the end, the economic burden would be borne by consumers. Since everyone is a consumer, inflation would go higher and higher.
The government has a lot of explaining to do to avoid unnecessary panic which would possibly make this subsidy restructure fail like last time. (Remember improvement in public transports?) It is not merely a subsidy cut. The change is meant for consumers to reduce fuel consumption and for oil subsidy to be directed to the right people (i.e. those who commit to reduce consumption). We need to change our flawed understanding of subsidy. It is an incentive, not an aid. Subsidy should not be meant to ease consumers’ burden but to encourage them become efficient.
From now on, we need to take carpool seriously. It’s good for the environment and mental health, too.