Inflation Fears May Slow Malaysia Subsidy Cuts Economics Essay

Malaysia spends about 73 billion ringgit ( $ 22 billion ) a twelvemonth on subsidies, Prime Minister said on April 6, naming the sum “ non sustainable. ” Basically, Malaysia is be aftering to cut down its subsidy easy to impede triping record rising prices. This is fixing for revamping a system that ‘s hampered attempts to cut down the authorities ‘s budget shortage. Mentioning to the definition of subsidy, a grant paid by a authorities to houses that benefit the populace, it is clearly shown that the old system is chiefly about authorities ‘s portfolio on subsidy that maintains selected goods at low monetary value for consumers. Furthermore, this action is taken by the authorities sing that a planetary bond sale, aims to contract its budget shortage to 5.6 per centum of gross domestic merchandise this twelvemonth from a 22-year high of 7 per centum in 2009.

It is believed that authoritiess pay providers to maintain consumer goods below their true market values. However, the decades-old system, aimed at assisting the hapless, has besides benefited the rich and encouraged smuggling to neighbouring states where monetary values are higher. For case, sugar supplies ran abruptly last twelvemonth as profiteers took the sweetening across the boundary line into Thailand, where the monetary value is dual. Therefore, giving the subsidy is non the best declaration as deficit of goods will do rising prices[ 1 ]or more specifically demand-pull rising prices particularly on necessity goods such as sugar where the demand is inelastic.

a ) Approaching full employment degree of end product

Average monetary value degree

P2

AD2

P11

AD1

Y11

Y21 Real end product

B ) At the full employment degree of end product

Average monetary value degree

AD2

P2

P11

AD1

Y11 Real end product

Figure 1: Demand-pull rising prices

In figure 1 ( a ) , the economic system is near the full employment degree of end product with a little sum of trim capacity in the economic system. An addition in aggregative demand ( AD ) from AD1 to AD2 will ensue in an addition in the mean monetary value degree from P1 to P2 along with an addition in existent end product from Y1 to Y2. In figure 1 ( B ) , the economic system has reach full employment degree of end product where the end product can non spread out to run into the increased demand. It is known as strictly inflationary where the addition in AD ( AD1 to AD2 ) “ pulls up ” the mean monetary value degree ( P1 to P2 ) .

Looking on the deductions of cut downing the subsidy, it can be predicted that the monetary value of goods will acquiring expensive and finally put load on the hapless. Harmonizing to article, the rising prices rate rose to 1.3 per centum in March. Food monetary values climbed 1.7 per centum after the authorities scrapped its subsidy on white staff of life and raised its cap on sugar monetary values in January. In add-on, Malaysia ‘s consumer monetary value index, which has averaged 2.8 per centum over the past four old ages, jumped to 8.5 per centum in July and August of 2008 after the authorities raised retail fuel monetary values by every bit much as 63 per centum in a command to pare its subsidy measure as planetary petroleum oil monetary values soared.

Increase the income of the consumers is the lone manner to get the better of this job but this will incurred chance cost to the authorities. The authorities can non use contractionary financial policy as this will cut down the existent income of the consumers and non work outing the jobs. The people may besides non vote for the authorities in the following election if this policy is being implemented. Sing expansionary pecuniary policy, addition in supply of money will do rising prices in the long tally if the money excessive the sum of goods in the market. However, Bank Negara Malaysia ( cardinal bank ) may keep low and stable rate of rising prices if it manages to aim rising prices as people will non anticipate higher rates of rising prices and do demands for additions in rewards lower than the expected rate of rising prices. This will cut down the cost of production and the monetary value of goods will stay low even without the subsidy from the authorities. Therefore, the authorities can utilize disbursals on other of import sectors such as health care and instruction which will convey great potency in the economic system ‘s growing and the development of state.

As for decision, there will be both advantages and disadvantages of cut downing the subsidy. However, it depends on how the authorities creates a policy which will convey more benefit to the society and besides growing to the state ‘s economic system.