Direct cash aid proposal gets the thumbs up

 

Rather than continue with subsidies, the government should put money in the hands of the most needy.

PETALING JAYA: Putting cash directly in the hands of the poor is better than keeping prices down by using subsidies, according to the business community and an economist.

However economist Carmelo Ferlito said, in the longer term, liberalisation is the way to help those in the lower income group.

Newly-appointed plantation and commodities minister Johari Ghani had, during the Dewan Rakyat sitting last month, proposed that the subsidy for cooking oil sold in 1kg polybags be replaced with direct cash aid to low-income households.

He claimed that there had been cases of wholesalers purchasing the cooking oil at the subsidised price of RM2.50 per 1kg polybag and reselling it to micro-enterprises for a profit.

He said it was necessary to replace the subsidy with cash aid to curb leakages.

Last year, the government’s budget for subsidising the price of cooking oil sold in the 1kg polybags was RM4 billion.

Malaysian Indian Restaurant Owners Association (Primas) president J Govindasamy told FMT Business the advantage of cash aid is that recipients can also spend the money on other needs.

Ameer Ali Mydin, managing director of retail chain Mydin Mohamed Holdings Bhd, said switching from subsidies to cash handouts could also result in savings for the government.

“The best way to help them (B40) is to give them cash instead of subsidising the prices of cooking oil, sugar, flour or even petrol,” he told FMT Business.

However, Govindasamy also reiterated that there must be a well-defined mechanism to ensure the cash goes directly to those who need it.

“How the government plans to do it remains a big question,” he added.

A total of 60 million packets of cooking oil is produced a month, or a total of 720 million a year, all of which is sold at retail outlets. This means everyone, rich or poor, has access to the subsidised cooking oil.

Purpose-vouchers allocation

However, Ferlito, who is CEO of the Center for Market Education, believes the government should take it a step further.

He told FMT Business the guiding principle for long-term subsidy reform should be liberalisation.

“Liberalisation acts as a companion to freedom of choice, which ultimately will bring prices down, thereby benefiting the consumers,” he said.

However, he said, given that liberalisation is a time-consuming process, an interim solution is essential.

“The government should provide goods and services at market price while aiding those in the lower-income group with ‘purpose vouchers’ based on their income,” he said.

“Issuing purpose vouchers rather than cash enables the development of a voucher market. This ensures a more precise and targeted distribution of assistance,” he added.

By doing so, he said, the government could avoid a more complicated situation where businesses are receiving the subsidies rather than individuals.

“This is the most obvious example of how subsidising the prices of goods has distorted the market to a point where any possible solution is difficult and imperfect,” Ferlito added. - FMT