Bankrupt by 2019???? And hence, we all suffer?

This is absolutely frightening news. Is it for real?

TheStarOnline reported:

“Malaysia will be bankrupt by 2019 if it does not cut subsidies and rein in borrowings, said Minister in the Prime Minister’s Department Datuk Seri Idris Jala on Thursday”.

It appears that at target to prevent the “bankruptcy of the Nation” would be to rationalize the subsidies. It is basic that subsidies are costs to the Nation and like every cost, it has to be evaluated and brought down where possible to reduce the deficit and debts faced by our country.

However, there are a few points that the Government experts should look into and bear in mind:

a)      Subsidies cannot be looked upon as costs in the same manner as we do in the private sector.

Sure, it is equally basic that subsidies distort market mechanisms. In fact, it is precisely due to the fact that market mechanisms do not allow the goods and services to be allocated to target groups that subsidies are introduced in the first place. Hence, free market arguments or so-called efficient allocations of resources cannot be the sole argument for or against subsidies.

Subsidies are costs but unlike the private sector it is not a cost incurred in the process of profit maximization. Private sectors primary motive is to maximize profits and hence they will be geared towards keeping costs at its minimum – even to the extent of retrenching workers (destroying homes) or ‘maximising productivity” of its existing workers (capitalistic oppression).

The purpose of Government is not the maximization of profits but the maximization of the citizen’s general welfare. This is something I pray that the clever advisers of the Government with their corporate background keep uppermost in their minds. It is not a mere question of statistics and economic theories. Corporate thinking and Government thinking should in many instances be different. Let us not get carried away with this new slogan of “corporate values” in the Government while we acknowledge it has its relevance!

While in the private sector, we try to minimize “unproductive costs”, the same costs may actually be social costs that are necessary for the maximization of the citizens’ general welfare.  For example, if Government schools are left to market mechanism, the majority of the people will be priced out of education.  We will become a Nation of illiterates. Hence, we recognize that subsidization of education is something we have to bear and we have to find the funds needed. This is one sector I think any responsible government should not compromise.

While subsidies increase Government expenditure, it also increases the standard of living of the people. Therefore, any reduction is subsidy will have an impact on the living standard. This is a tradeoff which we must carefully consider before getting carried away with numbers and statistics.

b)      Which subsidies to reduce or do away?

I am actually ashamed that despite the blessings that God has given this Nation, we are still unable to provide completely free education to all Malaysians, irrespective of race or religion. Obviously this is so because of the leakages (corrupt monies hoarded by…) and misallocation of resources towards projects that do not directly affect the people’s general standard of living.

It is critically important that the Government does not cut on subsidies that will further burden the general populace in order to free the resources towards other grand but wasteful projects. This is my real fear having seen the way we have developed Malaysia since Merdeka. I am not denying we have not developed. Yes, we have. But we could have developed in better ways and at less inflated costs. I have never been for the module of giving the people RM10 and the project owner making RM100. Such things are, in my Muslim mind, riba or usury. Government projects, due to its guaranteed payments should be costing much less, actually.

Briefly, it is important to carefully determine which subsidies that will be the target of ratinalisation.

c)      Existence of subsidies may actually encourage economic activity

The existence of subsidies actually keeps the general costs of doing business low in the sense that it keeps the costs of living low. On the contrary, the removal of subsidies will raise costs of production and will make Malaysia unattractive towards investments. This is primarily because, the removal of subsidies will eventually cause a rise in the general price levels, even causing inflationary tendencies in the economy. Imagine if petrol prices are raised, it will certain cause almost all other prices to increase. This in turn will increase the cost of living leading to people seeking higher wages.

Hence, the existence of subsidies actually keep the costs of production low, making investments attractive and thereby providing the opportunity for higher increase in the national income.

Therefore it is misplaced to view subsidies in isolation as if there is no increase in GDP and then conclude that it will bankrupt the Nation.

d)      Have we explored other ways to reduce costs and/or raise funds?

Basically, the idea of removing subsidies is to free resources/funds to other sectors. I believe a lot of resources can be positively channeled and funds “saved” if the Government was to seriously focus on the following:

(a)                Reduce the size of the civil service by 50%. There is too much duplication and wastage of tax payer’s monies in this sector. After the reduction, it may even be worthwhile to increase the remuneration of some of the civil servants.

(b)               Wage an all out war against leakages (corruption, etc)

(c)                The Government should seriously consider passing a law that enables the Government to recoup ill-gotten money by the culprits over the past 30 years or so. This will not be difficult to ascertain. I believe by this exercise alone, we should be able to recoup billions. Maybe a Recovery of People’s Assets Act is in order. However, this will require political will as it will largely involve politicians and their cronies.

(d)               Focus on economic activities that will uplift the living standards of the middle class and raise incomes all around. For the lower middle income, loosen up on licensing requirements to encourage the growth of small businesses or cottage industries.

(e)                I am absolutely certain that the Rakyat is fully aware of certain “sectors” that unnecessarily and unproductively taxing on the Government funds, whether at the Federal or State level.  The Government must have the courage to address these sectors and pull away the funds.

 

Peace !