Subsidy flip-flops sign of deeper problems, say economists

June 07, 2011 | The Malaysian Insider

KUALA LUMPUR, June 7 — Economists perceive the Najib administration as prone to backtracking on policies, with political concerns trumping the need for economic reform.

In a scathing commentary published today by the Singapore Straits Times, the government’s dithering over subsidy cuts for energy and basic consumer goods was criticised by regional economists who are stirring a wider debate over the country’s long-term economic prospects.

The Straits Times said the big question being asked now was whether resource-rich Malaysia had fallen out of step with the global environment.

Putrajaya’s subsidy flip-flops, the newspaper said, were putting a spotlight on deeper woes, while the country’s competitiveness continued to be hurt by state intervention.

In recent months, Malaysia has gone back and forth on its intention to cut the large subsidy bill.

The government backed down recently from raising petrol prices before eventually deciding to raise electricity tariffs by seven per cent beginning this month.

Putrajaya announced a 7.1 per cent hike in electricity tariffs in an effort to trim a subsidy bill that would otherwise double to RM21 billion this year, promising that the hike would not affect three-quarters of domestic users.

Power prices will rise by as much as 2.3 sen per kWh in areas taking TNB’s supply, a potential source of public anger just ahead of snap polls expected within a year.

The Straits Times reported today the arguments by economists that decades of state intervention that sought to meld free market practices with an ambitious social agenda to restructure the country’s multi-ethnic society in favour of politically dominant Malays had sapped Malaysia of its competitive edge as a destination for foreign investment.

They also told the Straits Times that the government’s experiment with state command capitalism had created an economy burdened by subsidies, tariff protection and licences that benefit powerful vested interest groups.

“The government is reluctant to take tough measures because of the political impact on the public and the vested interest (groups) it could hurt,” Centennial Group regional strategist Manu Bhaskaran told the Singapore paper.

“But the reality is that there are no easy options.”

The Straits Times pointed out that the Malaysian economy was at a crucial crossroads.

“Malaysia needs bold action because the regional economic environment is changing rapidly, and the breathing space is shrinking,” World Bank economist Philip Schellekens says in a recent interview.

Malaysia’s exports continue to face low-cost competition from regional rivals Vietnam, Indonesia and Thailand, while Najib’s ambition to transform Malaysia into a high-income economy is heavily reliant on foreign investment.

“Foreigners are adopting a wait-and-see attitude because there is little clarity over government policy in dealing with the economy,” a chief executive of a foreign bank here told the Singapore newspaper while asking not to be identified.

Malaysian households are already feeling the stress of rising prices while the Straits Times also cited a recent World Bank report on the country that noted rising household debt as a concern.

Lending to households — for property, credit cards and personal loans — accounted for 55 per cent of the total banking system lending, the report said.

The Singapore daily pointed out that Malaysia’s economic woes are providing the opposition with fodder against Najib’s administration.

The central theme of the opposition campaign is that politically powerful groups which benefit from licences are being spared at the expense of the public, the Straits Times said in its commentary.

“Consider Malaysia’s reluctance to reform its controversial import licensing system for luxury cars, worth hundreds of millions of ringgit annually. All cars not assembled in Malaysia must have so-called Approved Permits, or APs, which are issued for free by the government to a small group of licensees connected closely to the government.

“Typically, the APs are then sold to car distributors for prices ranging from RM10,000 to as much as RM40,000 each. These costs, as well as taxes imposed by the government, are then passed on to Malaysian consumers, who generally pay some of the highest prices for cars in the region,” the newspaper reported.