Subsidy Woes, more than meets the eye...

See Malaysiakini Subsidy Woes...

Economics-trained or free-market-inclined Malaysians are now speaking out loud, that we should accept the fact that subsidies are no longer tenable in today's globalised economy.

One recurring theme emerges: Market prices should dictate 'real prices' of goods and services as if the entire world is on par with each other, and the playing field is level the world over.

Thomas Friedman's The World is Flat dictum appears to influence everyman's idea of where the world is now and especially where it should be heading: "that globalization has leveled the competitive playing fields between industrial and emerging market countries."

But not everyone agrees that this perspective accurately reflects the situation on the ground. In the real world, perhaps some 80-90% of the world's people remain outside the reach and access of globalised markets and benefits (Why the World isn't Flat)

Professor Pankaj Ghemawat argues in Foreign Policy, Mar/Apr 2007, that more than 90% of all business worldwide are local affairs, where regional, investment and niche factors continue to dominate and exert great economic impacts.

But the 'reality bites' so forcefully enunciated by new-age economists are less sanguine and less certain for its unequal and asymmetric effects on the widely divergent and disparate economies around the world - invariably worse for poorer, less developed nations.

It is true that whenever governments try to apply 'unrealistic' protectionist methods to cushion local economies, (by price controls or artificial suppression on certain goods and services), these may in the longer term be harder to equilibrate when markets are forcefully pried open due to shocks such as the current oil price crunch. (It's worthwhile reminding ourselves that in 1990s, a barrel of oil was selling at US$10-20; in 2006 US$70; and today June 2008 we're at US$135 per barrel! See BBC's Why the oil price keep rising)

Supply chain mechanisms so long entrenched in our modern economic structure, have also undervalued many commodities such as grains (rice, corn or wheat), greens, fruits, etc.

Thus far, the brawn of being a farmer and/or grower has had unequal, artificially constrained but lesser benefits when compared with the downstream supplier, processor and/or distributor.

Then we have market speculators who disproportionately live off the paper or electronic gambles of artificial prices and guessworks, who profit at 'unreal' excesses, at the drop of a phone call, an email, an sms, or a wave of the hand!

Such inequitable distribution of economic benefits have led to great distortions and disparity of wealth. While most people welcome the much-touted 'trickle-down' effects, this mechanism tends to find its equilibrium at snail's pace. Completely free-market forces work by uplifting the lowest strata of society in staggeringly slow steps, whilst creating a smaller but hugely enriched upper class, a new bourgeoisie through near-instantaneous windfalls.

In Malaysia, to be fair, we have less of such a chasm of wealth disparity, although pockets of shameful indigence and poverty can be found in marginalised segments in inner city slums, suburban TOLs, hardcore rural communities, and some itinerant indigenous peoples.

More a problem would be that huge middle-to-low-income segments which embody a probable three-quarters of our population - these people are neither here nor there... Needless to say, these people will be hardest hit, when their bread-and-butter issues are put at serious jeopardy.

Because of our aggressive stance at luring Foreign Direct Investments (FDIs) with low-wages and tax-exempt pioneer statuses, many of our workers are paid artificially-suppressed salaries - hence their income has remained low. (For years, The Economist's Big Mac Index frequently attest to the fact that Malaysians are paying relatively cheaply for a similar priced Big Mac elsewhere.) To cushion this, we have introduced subsidies which are needed to price-control a basket of commodities, so that these remain affordable to the low earning power of the general populace!

Now we are told to buck up and face up to the facts - no more subsidies! We are expected to sustain our lifestyle with the relatively low wages that had for so long been thrust upon us, in the name of competitiveness for foreign funds and investments. Our workers have been denied minimum wage negotiations, and many industries are deprived of the bargaining power of trade unions!

On top of this, our Ringgit (Malaysian currency) has been protected from finding its true value, and we lag behind many regional currencies - our money is quite small! And we do this because, we wish for our exported goods to remain competitive...

Thus, our purchasing power has been severely curtailed when one wanders into the real globalised world out there - we have to pay so much more in real terms for goods outside this country. This is extremely onerous when one is a lowly-paid Malaysian worker.

So it is extremely unfair to now ask of Malaysians to tighten our belts and be more prudent! I don't believe the rakyat has been profligate or spendthrift, most of us just don't earn enough!

Then, we also have these ridiculously expensive prices of cars and road taxes. Whatever the arguments for discouraging outflow of local funds for foreign goods, we are simply paying too exorbitant a price.

For most Malaysians, owning a car is a necessity and not a luxury! Imagine that many cars are now hire-purchased upwards to 9 years! Imagine the interests one has to cough up, the loss of discretionary spending power for more productive purposes rather than just servicing unending loans. Painfully count the numbers - of wasted funds, which are a form of individual tax, the benefits of which elude us.

Of course, one can also argue for greater utilisation of local public transport, but these have always been the most inconsistent and arguably the worst managed public service! One spends hours in erratic, uncomfortable, crammed spaces, which once again makes the task of getting to and from work all the more wasteful in terms of loss of time, energy and productivity!

Our houses are also high-priced with relatively few people actually owning their own homes - some housing loans now stretch into 30 years and beyond, with some lenders introducing loan carry-forwards to the next generation! How sick and cynical to imagine that we pass on our debts into the new generation!

So how can the average rakyat cope especially now with further inevitable increases in costs for almost everything else on top of fuel, gas, food, etc? The authorities must find alternative measures to soften the blow of its most painful and inconsiderate fuel price hike in Malaysian history. It must take cognizance of all these real-life facts and how it is impacting the common people, and not argue Keynesian economic niceties for a beleaguered populace!

One must read the arrogant and insensitive editorial in yesterday's NST to understand the warped psyche of our MSM and its cloistered masters: "... after decades of mollycoddling with some of the world's highest fuel subsidies and lowest pump prices, the spoilt Malaysian consumer had no way to anticipate what it would feel like actually to have the candy snatched from the cradle... Enough of such mewling. This country has for too long carried too great a burden in its paternalistic protection of consumers, encouraging profligate consumption in blase indifference to real costs -- and can hardly be said to have received any lasting appreciation for that in return, witness the present administration's continuing travails in the wake of its mauling in the general election... this is the shock of recognition that runs the circle round: the anaesthesia of artificially low fuel and power prices had made a fools' paradise of life in this country. Now here's the wake-up call."

Such paternalistic scolding and the crass reference to vengeance against a populace which had not appreciated and thus rejected the previous administration at the last election, is truly uncalled for and shameful! It's no wonder that more and more Malaysians believe that the authorities and the mainstream media (MSM) have loss their bearings and are totally out of touch with the rakyat. Will they never learn?

But perhaps, there's more than meets the eye. I have heard quiet musings that our country coffers may be drying up. That despite our healthy trade surpluses month on month, we might be facing a credit crunch soon. Some business and economist friends have calculated that despite all the pump-priming from Petronas Ringgit diversions, we are now running out of bail-out money.

By refusing IMF and World Bank intervention and dictates during the 1997-8 financial crisis, the then government had pushed for and relied on internal funding on several mega-projects to sustain the appearance of a healthier than actual economy. It is believed that tens of billions of ringgit have been pumped into the Putrajaya and KLIA projects - now the chicken has come home to roost.

Some remembered that several Malaysian Sovereign Wealth Bonds have been sold at very attractive interest rates, and may now be at the verge of maturing - so, the reality of having to come true on our promises is near, unless we forfeit our goodwill and solvency! Perhaps these are the real reasons why we cannot sustain the subsidies, we are simply running on empty.

How is it we have not utilised our Petro-dollars or ringgit for better more prudent iron-clad funds for the future is a question that has to be addressed. Dr M Bakri Musa has lamented the fact that we have not had a Malaysian Petroleum Heritage Fund, to help safeguard our future and that of our next generations.

During the Agong's Birthday address, Baginda Yang Di Pertuan Agong Tuanku Mizan said "I was concerned when informed that by 2011, the nation's petroleum imports would be much higher than its exports. I am of the opinion that it would be an injustice if we were to completely extract and enjoy the benefits without leaving anything at all for future generations." Tuanku Mizan further noted that the nation's petroleum resources should be managed efficiently so that the nation's wealth could be inherited and enjoyed by future generations. We all echo His Majesty's wise call and heart-felt concern.

Malaysians can expect no less than a true and transparent accounting of the state of our nation's coffers - our future may hinge on this precarious crisis.