Economists welcome move to cancel direct subsidies for struggling sectors

 

Carmelo Ferlito says direct subsidies are likely to create artificial dynamics in the economy as a whole, while Goh Lim Thye says these industries should not rely entirely on taxpayer funds to survive.

PETALING JAYA: Two economists have welcomed economy minister Rafizi Ramli’s announcement that struggling industries will soon stop receiving direct subsidies from the government.

Rafizi said last week these industries will receive other forms of assistance to improve their structure and operations, adding that direct subsidies only serve as a temporary solution to maintaining their competitiveness.

Carmelo Ferlito of the Center for Market Education said Rafizi’s move was a step in the right direction for the economy, adding that direct subsidies were likely to create artificial dynamics in an industry and in the economy as a whole.

“(These are) dynamics that cannot be sustained when the support is removed and, therefore, they can create bigger damage,” he said.

Universiti Malaya senior economics lecturer Goh Lim Thye noted how some subsidies had been used to support uncompetitive sectors, and said they should be eliminated as these sectors relied entirely on taxpayer funds to survive.

“Those sectors should be restructured or reshuffled to boost their competitiveness,” he said.

“Furthermore, given our fiscal constraints of escalating external debt and low revenue, policymakers have to prioritise their spending on sectors worth supporting rather than blanket subsidies.”

Goh said while the shock of subsidy removal may force companies to close, it may also stimulate their competitiveness if they were determined to stay afloat.

He said while the subsidy removal could result in fluctuations in the unemployment rate and government spending in the short run, companies that can turn the tables would be able to enjoy higher revenue due to less competition in the long run.

He also called on policymakers to find ways to increase revenue to assist struggling sectors, adding that if the government must spend on them now, it must do so “prudently and intelligently”.

Goh’s comments echo a recent call by the World Bank’s lead economist for Malaysia, Apurva Sanghi, for the government to reform its far-reaching subsidy programmes. Apart from reducing expenditure, Apurva said, measures must be taken to widen the government’s revenue base.

Ferlito, meanwhile, said it was important for the government to discern whether it was the reason certain industries were in distress in the first place.

He cited the recent rising cost of raw materials and supply chain disruptions as examples, stating that they were caused by “useless and costly lockdowns” which were implemented “without a sound trade-off analysis”.

“Therefore, while removing support, the government should commit to stop being a source of trouble by interfering with the supply chain or implementing price controls,” he said.

“The two things must go together … no support, but also no artificial obstacles.” - FMT