Fuel Subsidy Reform in Malaysia: An Assessment on the Direct Welfare Impact on Consumers.
Keywords:
fuel subsidy, direct welfare impact, welfare lossAbstract
This paper investigates the issue of fuel subsidy reform in Malaysia by analysing the direct welfare impact resulting from fuel subsidy removal. Using the Household Expenditure Survey 2004/2005 with a sample of 4227 households, the analysis is carried out by segregating households into 3 different income groups and the welfare impact due to subsidy cut is measured. The results show that the reduction in welfare due to higher price is larger for the middle 40% compared to the top and the bottom 40%. This is due to the fact that the middle 40% has a larger budget share on fuel. Fuel subsidies are found to be costly in protecting poor households due to substantial leakage of benefits to higher income group but the welfare loss for the lower income group due to subsidy cut is somewhat higher in relative term due to the smaller size of their income. Thus, while subsidy reform is undeniably necessary, our findings suggest that it must be carried out cautiously. Our study suggests that the reform must be accompanied with strategies and programs to mitigate the welfare loss, not only for the lower income but also the middle income group as well.
Downloads
References
Beers, C.V., & Moor, A.D. (2001). Public subsidies and policy failures: how subsidies distort the natural environment, equity and trade and how to reform them. Cheltenham, UK: Edward Elgar Publishing Limited.
Cheok C.K. (2009). Missing the point: Malaysia’s debate on fuel price subsidies. Ekonomika. Retrieved from http://www.pem.org.my/doc/Ekonomika_%28Jan-Mar09%29.pdf Clements, B., Jung, H.S., & Gupta, S. (2007). Real and distributive effects of petroleum price liberalization: The case of Indonesia. The Developing Economies, 45(2), 220-237.
Coady, D., El-Said, M., Gillingham, R., Kpodar, K., Medas, P., & Newhouse D. (2006). The magnitude and distribution of fuel subsidies: Evidence from Bolivia, Ghana, Jordan, Mali and Sri Lanka. IMF Working Paper, 06(247). Washington D.C: International Monetary Fund.
Coady, D., Gillingham, R., Ossowski, R., Piotrowski, J., Tareq, S., & Tyson J. (2010). Petroleum product subsidies: Costly, inequitable and rising. IMF Staff Position Note, SPN/10/05. Washington D.C: International Monetary Fund.
Du, X., Hayes, D.J., & Baker, M. (2008). A welfare analysis of the U.S ethanol subsidy (Iowa State University Working Paper 08-WP 480. Retrieved from http://www2.econ.iastate.edu/research/webpapers/paper_13003.pdf
El-Said, M. & Leigh, D. (2006). Fuel price subsidies in Gabon: Fiscal cost and distributional impact. IMF Working Paper, 06(243). Washington D.C: International Monetary Fund.
Granado, J., Coady, D., & Gillingham, R., (2010). The unequal benefits of fuel subsidies: a review of evidence for developing countries. IMF Working Paper, 10(202), Washington D.C: International Monetary Fund.
Greve, B. (2008). What is welfare? Central European Journal of Public Policy, 2(1), 50-73. Gupta, S., Clements, B., Fletcher, K., & Inchauste, G. (2003). Issues in domestic petroleum pricing in oil producing countries: Fiscal policy formulation and implementation in oil- producing countries. IMF Working Paper, 02(140). Washington D.C: International Monetary Fund.
World Bank. (2010a). The scope of fossil-fuel subsidies in 2009 and a roadmap for phasing out fossil-fuel subsidies. G-20 Summit Meeting, Seoul, Republic of Korea.
World Bank. (2010b). Analysis of the scope of energy subsidies and suggestions for the G-20
initiative. G-20 Summit Meeting, Toronto, Canada. International Energy Agency (IEA). (2009). World Energy Outlook 2009. Paris, France: International Energy Agency.
Jennifer, E. (2010). The effects of fossil-fuel subsidy reform: A review of modelling and empirical studies. Geneva: International Institute for Sustainable Development.
Jones, D., & Steenblik, R. (2010). Subsidy estimation: a survey of current practices. Geneva: International Institute for Sustainable Development.
Luenberger, D. (1995). Micro economic theory. New York: McGraw-Hill.
Malaysia. (2010). Tenth Malaysian Plan 2011-2015. Kuala Lumpur: National Printers.
Olivia, S. & Gibson, J. (2006). Household energy demand and the equity and efficiency aspects of subsidy reform in Indonesia. International Association of Agricultural Economists Conference, Gold Coast, Australia.
Paul Tan’s Automotive News. (2011). Malaysian fuel prices. Retrieved from http://paultan.org/topics/special/Malaysian-fuel-prices/
Sugema, I., Hasan, M., Oktaviani, R., Viliani, A., & Ritonga, H. (2005). Dampak kenaikan harga BBM dan efektivitas program kompensasi. INDEF Working Paper. Retrieved from http://www.indef.or.id/download/pubs/BBM.PDF
The Star Online. (2008). Experts say fuel subsidy unsustainable. Retrieved from
http://biz.thestar.com.my/news/story.asp?file=/2008/1/14/business/19952483&sec=business.
The Star. (March 21, 2011). Malaysia has no intention of reviewing fuel subsidy. MSN News. Retrieved from https://sg.news.yahoo.com/malaysia-no-intentions-reviewing-fuel-subsidy-20110320-224002-760.html
Van Praag, B.M.S., & Frijters, P. (1999). The measurement of welfare and well-being: The Leyden approach. In D. Kahneman, E. Diener, and N. Schwarz (eds.), Foundations of hedonic psychology: Scientific perspectives on enjoyment and suffering. New York: Russel Sage Foundation.
World Trade Organization. (1994). Agreement on subsidies and countervailing measures. Retrieved from http://www.wto.org/english/docs_e/legal_e/24-scm_01_e.htm
Yusuf, A., & Resosudarno, B. (2008). Mitigating distributional impact of fuel pricing reform: Indonesian experience. ASEAN Economic Bulletin. Retrieved from http://findarticles.com/p/articles/mi_hb020/is_1_25/ai_n29456841/
Downloads
Published
How to Cite
Issue
Section
License
This work is licensed under a Creative Commons Attribution 4.0 International License.
Disclaimer
Global Business Management Review (GBMR) has taken all reasonable measures to ensure that material contained in this website is the original work of the author(s). However, the Journal gives no warranty and accepts no responsibility for the accuracy or the completeness of the material; no reliance should be made by any user on the material. The user should check with the authors for confirmation.
Articles published in the Global Business Management Review (GBMR) do not represent the views held by the editors and members of the editorial board. Authors are responsible for all aspects of their articles except the editorial screen design.
Submission of an article is done with the understanding that the article has not been published before (except in the form of an abstract or as part of a published lecture, or thesis) that it is not under consideration for publication somewhere else; that if and when the article is accepted for publication, the author's consent to automatic transfer of the copyright to the publisher.