Palm oil: Time for more refineries

Written by MDYSphere

Demand for agriculture products has an inelastic demand and it implies that a reduction in the demand for palm oil means that revenue will fall drastically (percentage decrease in price is larger that percentage decrease in quantity demanded).



In theory producer of agricultural products tend to limit its production as acquire high price in order to gain larger revenue.

MIRI, July 26 (Bernama) -- Plantation Industries and Commodities Minister Datuk Peter Chin Fah Kui will meet his Indonesian Agriculture Minister Dr Anton Apriyantono in Jakarta next week to discuss measures to be taken concerning the current downward trend of palm oil prices. Speaking to reporters here Saturday, Chin said the meeting would be significant for both countries as they commanded over 85 percent of the world's palm oil production . Definition of having monopoly power is to have control 1/3 of the market production. Malaysia and Indonesia have 95% of the world supply of the palm oil and it is surprising to see that consumers are controlling over the price of palm oil.

Sabah became the country's main palm oil producer on 1.24 million hectares of the total 4.3 million hectares, Plantation Industries and Commodities Deputy Minister Datuk Anifah Aman said Saturday (DE 17.02.08).

The government must be diligent enough to be able to control its supply of palm oil so as to control the price of palm oil. I recommend at time of fall prices, producers must put more attention on refineries even its means accruing less revenue until world palm oil price become attractive once again.

This article is being mirrored from MDYSphere.BlogSpot.Com

Subsidies: Microeconomics point of view

Written by MDYSphere

I agree with you subsidies on the price of petrol is inevitable . You have illustrated at the macro level how subsidies can achieve a desirable level of GDP. Once subsidies are placed into the economy, the multiplier effect will play its part.



When we talk about subsidy we are referring to Fiscal Policy which deals with government spending (Expenditure) and Imposition of Tax. It is an important policy to check and balance the economic activities within an economy.

Government expenditure on subsidies can be looked at as a long-run investment. Obviously, one talk about investment one must consider the concept of Opportunity cost of that investment. Notwithstanding the social obligations of government, perhaps, one way of looking at subsidies as a waste of resources is when the opportunities forgone for such subsidies are not taken seriously. Worst still if subsidies are presumed to stimulate spending during inflationary period. Having that extra money without prior having to produce goods and services for such extra money would only create further inflation as too much money chasing too few goods and services. An example is the subsidies on petrol recently introduced by the government, where cash money is given to motorists.

Another unique example for subsidies is the way Japanese government spent million of yen on subsidising rice. Rice was once so important to Japan’s culture that it was worshipped as a god. Yet the economic problems now facing Japan’s rice farmers make it almost impossible for them to make money. As a result, the Japanese government subsidises the industry and tries to stop imports of foreign rice. Other nations complain these practices breach world trade rules, but it could be very hard for the rice farmers to manage without such subsidies. The US, Australia and China would be popular and cheaper than the home-grown variety. Why then the Japanese government went to the extent in breaking the world trade rules and at the same time, what happen to the law of comparative advantages.

I like to look at the micro economics theory to illustrate why it is important for the government to invest by means of subsidising the price of petrol. We begin by looking at four main reasons that cause the price of crude oil to increase which in turns increase the price of petrol.

Supply and Demand

As incomes rises, economies use more energy for transport, and producing goods and services. Abroad cross section of nearly 180 countries shows that doubling per capita income more than double per capita oil consumption. How much each country contributes to increases in global energy demand depends on its population and rate of income growth.

Micro economics demand and supply theory suggests that there is an inverse relationship between price and quantity. The magnitude change in price and quantity depend on the individual elasticity. Empirical evident suggests that both supply and demand of crude oil tend to be relatively inelastic in short run. What this means is that an increase in demand would shift the demand curve to the right at a given supply curve - a greater percentage increase in price as compare to percentage increase in quantity. However, it unlikely supply will be able to meet demand in the short-run due to the nature of crude oil business. Oil exploration and production require huge investments over long periods. In the long-run supply curve will move to the right and a new equilibrium is reached. At the new equilibrium, the new price will be much higher than the old equilibrium price.

Mismatch between reserves and economic systems

A large part of the world’s oil reserves are outside the easy reach of free market, with their incentives and disciplines. Oil prices are rising not because the world is running out of oil but because the bulk of reserves are in countries where market incentives cannot work fully or in the hands of monopolists who may be exercising their power by restraining investment

Speculation

The price of crude oil is controlled by an elaborate financial market system as well as by four major Anglo-American oil companies. It has been argued that as much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of peak oil. It has to do with control of oil and its price.

Dollar’s Weakening

Oil has long been traded in U.S dollars. It is believed that having a single-currency system lowers transaction costs for commodity that trades globally. The weakening of dollar has a direct impact on demand, supply and price of petrol. A declining dollar makes oil cheaper for consumers this in turn increase demand for petrol. A weakening U.S. currency also reduces the dollar-denominated supply from foreign producers. Together, these two factors exert additional upward pressure on prices. When comes to adjustment in oil consumption and production, a declining dollar takes time to reshape crude oil prices because expectations do not shift quickly. Factors that push up expectations of future prices, however, also put upward pressure on spot prices because markets will adjust until investors are indifferent between holding and selling the marginal barrel of crude oil on the spot market.

Given such factors it is clearly be seen such notion of the invisible hand of Adam Smith by letting the market forces to determine the price equilibrium for patrol is no longer applicable when we referring to petrol production nowadays. Demand and supply situation only play small part in determining the market equilibrium for patrol. On the other hands, even if we agreed that Smith theory is applicable, the price equilibrium will never be reached in the long run. This is true if one looks at Cobweb model which illustrates that given the differences in elasticity of both demand and supply for a product tend be unstable. At this situation where the supply curve is more inelastic than the demand curve for petrol as such the price of petrol will never be stable in the long run. What it implies here is that price of petrol will never be at equilibrium because of mismatch between reserve and economic system, speculators, and the weakening of US dollar. Therefore, when talking about the determination of price of petrol we are no longer talk about the Adam smith notion of invisible hand. The price of petrol and the elasticity of supply and demand are solely determined by the visible hand of the factors mentioned earlier.

We expect the global price of petrol to remain relatively high. Therefore, we need to use other measure to predetermine our local price of petrol. One of the tolls is giving subsidies on the price of petrol. The reason is simple. Subsidies on price of petrol must be treated as a form of investment and the return on investment would be in the form of income collected through tax from businesses. Subsidies reduce the price of petrol and will reduce the cost of production. The reduction on cost will lead to profit for profit maximisation firms and further increase earning for the government. Were profit is there to be captured there will be more investment and more profit that leads to further increase in earning capacity for the government. Obviously, the government needs to find sources on how to finance the subsidies and this problem has been touched by certain politicians.

Subsidies will eventually be self-financing and this is because in the long run the extra earnings by the government will eventually pay for the subsidies invested. The policy of reducing income tax, waive the dividend tax and RPGT has little impact on the burden by the increase in the price of petrol. Money given directly to the population, at times, can do more harm than good to the economy. We must remember lots of money in the pocket does not necessarily imply that money can acquire more goods and services. What matters is the purchasing power of money that we have in the wallet. Therefore, subsidy on the price of petrol is money given indirectly to the population and there is no question of too much money chasing too few goods and services in the economy.

Mirrored from MDYsphere.BlogSpot.Com

Oil price up, palm oil price down

Written by Arimi Sidek

So what now? Fuel price increases, and palm oil price drops.



This is double trouble for Malaysia. And it is more to Sabah as here, state government is deeply in love with Sawit. I guess state government just never learn - it goes on repeating the same mistake twice.

Previously, we were focus only on timber until much timber resources depleted nearly completely. And now, we are too focus on palm oil, that exposes us to much to the risk of overly dependent on a single source of income. Read on

MIRI, July 26 (Bernama) -- Plantation Industries and Commodities Minister Datuk Peter Chin Fah Kui will meet his Indonesian Agriculture Minister Dr Anton Apriyantono in Jakarta next week to discuss measures to be taken concerning the current downward trend of palm oil prices.

Speaking to reporters here Saturday, Chin said the meeting would be significant for both countries as they commanded over 85 percent of the world's palm oil production.

"Malaysia and Indonesia as the producing countries (for palm oil) view this trend with anxiety," he said, adding that all factors that led to the downward trend of the commodity would be analysed at the meeting.

Chin said the price of palm oil had closed at RM3,095 per tonne yesterday and this was way below the average price of RM3,500 per tonne over the last four years.

Don't bank everything on palm oil

Written by arimi sidek

Sabah became the country's main palm oil producer on 1.24 million hectares of the total 4.3 million hectares, Plantation Industries and Commodities Deputy Minister Datuk Anifah Aman said Saturday (DE 17.02.08).


palm oil tree

It is more actually, to the excitement and joy of palm oil industry. At present, it contributes about 16pc to the State’s GDP. It also provides employment to about 60,000 people, representing about 5.4pc of the state’s total workforce. Oil palm is currently Sabah’s main agriculture crop.

Note: This is a reproduction of my article that was published in Daily Express newspaper [Sabah], aims to cater wider and more serious audience on the matter.

There is something else about the news that interests me. The statement somewhat lures us to think that palm oil industry in the State focuses on 14,346 smallholders, which I suspect is not. If we divide 1,240,000 hectares by 14, 346 the average will be 86.43 hectares - about 213.58 acres. There is no way plantation of this size fit into small holders category.

The real industry players not even mentioned. So let get, it straight. Palm oil industry in the state actually focuses on big plantation companies, not smallholders. Peninsular-based companies are among the key players. Hence, the smallholders figure is simply cosmetic more or less, to my thinking.

The locus of palm oil industry is big plantations – more than 80pc are located in Sandakan, Tawau and Lahad Datu. POIC Sabah Sdn Bhd, a state-run company, managed clusters of designated areas in Lahad Datu, Sandakan and Kimanis, known as Palm Oil Industrial Cluster (POIC).



palm oil authorities in malaysia

Another thing. The average age of small holders, which is at 54, is also very interesting. This is an average figure so I presume that majority of them are older than 54. The golden aged small holders actually pose more questions than answers.

Since palm oil plantation is relatively new to the state, I really wonder who are these small holders. For example, they probably were in agricultural sector such as cocoa or rubber before switching to palm oil. Or, they can be new comers who ventured into palm oil after retirement from public service I.e. pensioners.

But, with average “small” holding of 213 acres, they certainly are dubious kind of "average" pensioners. If that being the case, perhaps government will shed some light on the matter.

Whatever the answer is, the situation is not good for our economy. It implies that owners / small holders are at the near end of their productive life. Perhaps younger generations are not interested to work in palm oil sector and this is scary. If this really happen, then guess who are forever among those 60,000 plantation workers!

The news further stated that Sabah has a very high potential to further develop in oil palm industry will in turn generate the economy. I truly wish this vision not going to be translated into more plantations, involving more agriculture areas.

This is because, unless Sabah land mass area is getting bigger and bigger over time, this “sawit” thing seems encroaching every area suitable for agriculture in the State.

According to state government website, out of total land area of 2.1 million hectares identified suitable for agriculture, 1.25 million hectares have been developed. Another source cited that palm oil is by far the main crop cultivated, occupying about 81pc of the total cultivated land area.

Now palm oil area in the state is 1.24 million hectares, as the news said.

I won’t blame palm oil planters; palm oil based entrepreneurs and or smallholders for promoting and switching to palm oil. There is nothing personal in capitalist economy system. It is about money making business and profit maximization.

But do not underestimate the danger posed by dependency on single source of earning situation to the economy. Malawi and Costa Rica had learnt it the hard way.

Also in Haiti, Ghana and Nauru, to mention a few. In the event such as competition from other countries or any reasons that cause price to drop, or anything that causes production to fail, the whole economy lands into trouble.

We should learn by our mistake in the past when the sole major source of earning was timber. Being the richest state in Malaysia in 1970s Sabah slipped down to the poorest in 1990s. We are closer to repeat it once again, by leaning more and more on palm oil as the sole source of income.

It is government who should provide “hala tuju” and product diversification, not the business sector. Speaking of “hala tuju” in agriculture, Sabah’s Second Agricultural Policy (SAP 2 1999 – 2010) is meant to guides the agriculture development in the State.

It speaks on “transforming smallholders into a commercial and dynamic sector”. However, in the case of palm oil, there will not be so much concern on transforming small holders if the focus is on big players and the small holders' role is minimal.

I don’t know how to relate palm oil plantation with “increasing level of domestic and food production”, another “essence” of SAP2. Perhaps SAP2 talks about “other” agriculture sectors too.

But since palm oil sector is getting closer to become the “only” agriculture sector available in Sabah in term of area coverage, its only natural for it to fit into all essences of SAP2 as the government medium-term plan in agriculture development.

Creating policies such as SAP2 incurs financial cost and consumes a lot of time. Hence, adhere to what has been planned is always a better choice for government.

Last but not least, bad economics or the negative impacts due to over-development process of palm oil sector need to be seriously considered.

For example, in Sarawak, environmentalists claimed that Malaysia's lucrative palm oil industry and unabated logging are destroying native lands in eastern Sarawak state, while indigenous people are left in extreme poverty.


Source: Daily Express Newspaper, 24 Feb 2008. pp. 17

Comments

kalapa sawit - what can we say? |2008-06-14
this is the capitalist system... profit maximization is the objective of any business so it is only natural for businessman to switch on to palm oil

Don't bank everything on palm oil

Written by arimi sidek

Sabah became the country's main palm oil producer on 1.24 million hectares of the total 4.3 million hectares, Plantation Industries and Commodities Deputy Minister Datuk Anifah Aman said Saturday (DE 17.02.08).


palm oil tree

It is more actually, to the excitement and joy of palm oil industry. At present, it contributes about 16pc to the State’s GDP. It also provides employment to about 60,000 people, representing about 5.4pc of the state’s total workforce. Oil palm is currently Sabah’s main agriculture crop.

Note: This is a reproduction of my article that was published in Daily Express newspaper [Sabah], aims to cater wider and more serious audience on the matter.

There is something else about the news that interests me. The statement somewhat lures us to think that palm oil industry in the State focuses on 14,346 smallholders, which I suspect is not. If we divide 1,240,000 hectares by 14, 346 the average will be 86.43 hectares - about 213.58 acres. There is no way plantation of this size fit into small holders category.

The real industry players not even mentioned. So let get, it straight. Palm oil industry in the state actually focuses on big plantation companies, not smallholders. Peninsular-based companies are among the key players. Hence, the smallholders figure is simply cosmetic more or less, to my thinking.

The locus of palm oil industry is big plantations – more than 80pc are located in Sandakan, Tawau and Lahad Datu. POIC Sabah Sdn Bhd, a state-run company, managed clusters of designated areas in Lahad Datu, Sandakan and Kimanis, known as Palm Oil Industrial Cluster (POIC).



palm oil authorities in malaysia

Another thing. The average age of small holders, which is at 54, is also very interesting. This is an average figure so I presume that majority of them are older than 54. The golden aged small holders actually pose more questions than answers.

Since palm oil plantation is relatively new to the state, I really wonder who are these small holders. For example, they probably were in agricultural sector such as cocoa or rubber before switching to palm oil. Or, they can be new comers who ventured into palm oil after retirement from public service I.e. pensioners.

But, with average “small” holding of 213 acres, they certainly are dubious kind of "average" pensioners. If that being the case, perhaps government will shed some light on the matter.

Whatever the answer is, the situation is not good for our economy. It implies that owners / small holders are at the near end of their productive life. Perhaps younger generations are not interested to work in palm oil sector and this is scary. If this really happen, then guess who are forever among those 60,000 plantation workers!

The news further stated that Sabah has a very high potential to further develop in oil palm industry will in turn generate the economy. I truly wish this vision not going to be translated into more plantations, involving more agriculture areas.

This is because, unless Sabah land mass area is getting bigger and bigger over time, this “sawit” thing seems encroaching every area suitable for agriculture in the State.

According to state government website, out of total land area of 2.1 million hectares identified suitable for agriculture, 1.25 million hectares have been developed. Another source cited that palm oil is by far the main crop cultivated, occupying about 81pc of the total cultivated land area.

Now palm oil area in the state is 1.24 million hectares, as the news said.

I won’t blame palm oil planters; palm oil based entrepreneurs and or smallholders for promoting and switching to palm oil. There is nothing personal in capitalist economy system. It is about money making business and profit maximization.

But do not underestimate the danger posed by dependency on single source of earning situation to the economy. Malawi and Costa Rica had learnt it the hard way.

Also in Haiti, Ghana and Nauru, to mention a few. In the event such as competition from other countries or any reasons that cause price to drop, or anything that causes production to fail, the whole economy lands into trouble.

We should learn by our mistake in the past when the sole major source of earning was timber. Being the richest state in Malaysia in 1970s Sabah slipped down to the poorest in 1990s. We are closer to repeat it once again, by leaning more and more on palm oil as the sole source of income.

It is government who should provide “hala tuju” and product diversification, not the business sector. Speaking of “hala tuju” in agriculture, Sabah’s Second Agricultural Policy (SAP 2 1999 – 2010) is meant to guides the agriculture development in the State.

It speaks on “transforming smallholders into a commercial and dynamic sector”. However, in the case of palm oil, there will not be so much concern on transforming small holders if the focus is on big players and the small holders' role is minimal.

I don’t know how to relate palm oil plantation with “increasing level of domestic and food production”, another “essence” of SAP2. Perhaps SAP2 talks about “other” agriculture sectors too.

But since palm oil sector is getting closer to become the “only” agriculture sector available in Sabah in term of area coverage, its only natural for it to fit into all essences of SAP2 as the government medium-term plan in agriculture development.

Creating policies such as SAP2 incurs financial cost and consumes a lot of time. Hence, adhere to what has been planned is always a better choice for government.

Last but not least, bad economics or the negative impacts due to over-development process of palm oil sector need to be seriously considered.

For example, in Sarawak, environmentalists claimed that Malaysia's lucrative palm oil industry and unabated logging are destroying native lands in eastern Sarawak state, while indigenous people are left in extreme poverty.


Source: Daily Express Newspaper, 24 Feb 2008. pp. 17

Comments

kalapa sawit - what can we say? |2008-06-14
this is the capitalist system... profit maximization is the objective of any business so it is only natural for businessman to switch on to palm oil

Sabah's transport system needs overhaul

Written by arimi sidek

It is something that we probably are not aware of. But there is an economic discipline known as transportation economics. Transport economics is a branch of economics that deals with the allocation of resources within the transport sector and has strong linkages with civil engineering. The core of the discipline is about of the allocation of transportation resources in order to meet the needs of a society.

Note: This is a reproduction of my article that was published in Daily Express newspaper [Sabah], aims to cater wider and more serious audience on the matter.

The development of models to estimate the likely choices between the non-similar goods involved in transport decisions (discrete choice models) led to the development of an important branch of econometrics, and a Nobel Prize for Daniel McFadden.

In a macroeconomic sense, transportation activities form a portion of a nation's total economic product and play a role in building or strengthening a national or regional economy and as an influence in the development of land and other resources.

But, even without knowing about transportation economics, one will be able to notice that public transportation in Sabah is far from being efficient at present.

To be more specific, let's begin with bus as the core of public transport in the State. I rather call them as mini bus and van.

So far, the only available "upgrade" I can see in Kota Kinabalu city so far are the terminals. But even these, there are so many things that we can talk about. For example, enough to say that if Wawasan bus terminals ran by a company, it would have gone bankrupt long ago.

It is located at the far end of the city and both mini bus operators and commuters seems try their best to avoid it. They prefer doing business together i.e. loading and waiting at the two most congested spot in the city. One, at the bus stop in front of Shang-Ri-La hotel not far from Bandaran Berjaya. And the other, at the old Cathay cinema bus stop.

I can accept the fact that those terminals are part of the whole public transportation restructuring process, to our joy as Sabahan.

The only problem is that, we do not live in future – we live at present. If there are such things as transport development planning in phases and in place for the time being, apart from those terminals, what are they?

More on mini bus and van. You probably confuse on why do I put them in separate categories. But mini bus – with around 24 seaters, and van are truly different in term of capability, technology, comforts and also safety. But both are a misery for public commuters. I wonder for how long Sabahan will commute and transport by van. It is too much to traveling discomfort for a ‘city’ dweller. It’s van, not a bus.

It is okay if you travel with your family, but not as a public transportation means. If you think it is deem appropriate, why KL don’t use vans instead of monorail and LRT?

I do see some improvement to be fair with. Bus drivers have uniforms now. But their busses are still in pretty bad shape. Try your journey to Tuaran and have a seat beside the van driver.

You may surprise in some of them, there is nowhere to plug in the safety belt. This is true not only for outside city mini bus area such as Tuaran, but for KK and the surrounding area such as Beverly Hills and Putatan as well.

The worst part of public transportation in the city is because they are highly unpredictable. The time management and schedule is far from efficient, it is highly unpredictable. It is not easy for Government to monitor and to supervise, even though they tried.

Most of bus operators are individuals and small operators under loose governance of Persatuan Pengusaha Pengusaha Bas Mini Bumiputra Sabah - (PPPBMBS).

It is timely for government to introduce the concept of consortium and conglomerate of all bus operators in the city, to start with. For example, bus transport in KL operated by 11 major companies only. Under this concept all bus operators unite themselves under one or several big companies that will benefit all rakyat.

For companies, they will enjoys greater degree of efficiency or “economies of scale” and commuters on the other hand, enjoy a better, convenience and reliable transport service.

Maybe it isn’t fair to compare Sabah transportation with those in Kuala Lumpur at present as the gap terribly huge. Say, compare ours to mini buses that once also available in KL.

The mini bus (1975 - 1998) was responsible for servicing nearly 60 different routes, but this was taken care of by only three major companies while smaller operators were allowed to service certain areas only.

Apart from mini bus, we need to observe on what is going on with Sabah State Railway – SSR. It is a real concern on how do we look at it. Should we look into it from only historical value, or from indirect economic potential and gains out of it such as from tourism, or from truly economic point of view?

SSR director seems proud for the term of "The Land of The Last Vulcans". In fact, SSR (1896) is only 12 years younger than Keretapi Tanah Melayu - KTM (1884). Both have been with us since the colonial era but as it is now SSR is dying and KTM is very much alive.

Recently, the federal government charged KTM to work alongside SSR to undertake short and medium term works on the railway to enhance its safety. This included rehabilitating the track and signalling and also overhaul of the rolling stock in order to ensure continuation of service.

But I doubt that SSR will ever be significant again to the state public transportation. Present day railway begins at Tanjung Aru and ends at Tenom with the to distance of 134 Km. On the other hand, Pan Borneo entire highway system is expected to be about 1047.18 km once completed.

I think the economic solutions; to shut it down forever is always the best option. Unless of course, somebody can convince on its value to tourism.

Source: Daily Express Newspaper, 2nd March 2008. pp.17

Subsidies are not something wasteful

Written by arimi sidek

Government should consider gradually reducing the subsidies given to the people, in order to prepare them and the country for stiff competition in the future, say Tengku Razaleigh Hamzah (“Govt should consider reducing subsidies gradually: Razaleigh” DE 5.2.08 ).

I can understand that our government strives for mindset change of Malaysians. This includes change from subsidy mentality to self sufficient mindset.

Note: This is a reproduction of my article that was published in Daily Express newspaper [Sabah], aims to cater wider and more serious audience on the matter.

In January, Deputy Prime Minister, Datuk Seri Najib Tun Razak was quoted as saying that if government continues to subsidise fuel it may not be able to build schools, universities, hospitals and the like.

It likely indicates government attitude toward subsidies at present. They suggest that subsidies are the total waste of resources to our economy. I suspect this has something to do with economists as they advice government on the issues.

Perhaps Malaysia’s economists are ready to rewrite the foundation of modern macroeconomics by introducing new economics theory on subsidies. As the existing one, I dare to say here that they are not a waste at all.

I write this from macroeconomics perspective, to share my view with policy makers, economists as well as general public. I believe correct perception on subsidies is necessary rather than to treat them simply as financial burden and of pure waste.

John Maynard Keynes (1883 – 1946) advocated the idea of active government role in economy either in the form of public works of subsidies. Subsidies are among those methods ever tried by President Franklin D. Roosevelt as USA struggled with depression in 1930s. Reluctantly, he then adopted Keynes method in large scale geared US economy toward full recovery in 1944.

1930s depression, Roosevelt, and Keynes are the true sources of modern macroeconomics as far as government active spending activities such as provision to build schools, university, hospitals, etc. which known as "G" in macroeconomics, are concerned.

It was during depression that economics theories rigorously tested and many had been rewritten. Without Keynes, 1930s great depression, and the open mind of US president at the time, we probably never heard of physical policy, monetary and growth policy as we understand now.

Subsidies simulate spending in wherever sectors they go to. In households sector, they increase households spending. If subsidies go to business sector, they boast businesses spending (or investment). Since there are more spending activities, Gross Domestic Products (GDP) increases.

Not only GDP increases, but the amount of increase is much bigger than the initial amount of subsidies. This is because, money changing hands so many times in the economy within a year. The impact known is as "multiplier effect", where multiplier estimates value of any country is called as "k".

More GDP means more production and government gets more income from taxes. Subsequently, government can use the additional tax income to build more schools, universities, military etc., as necessary.

I will not crack your head with statistical antics here, but I found none of official key statistics pointing toward this direction as far as subsidies are concerned.

Lets calculate how far the RM35 billions of government’s fuel subsidies gone to. When government subsidized fuel, it means government pay on behalf of households and business sectors. Hence, Malaysians no longer have to pay RM35 billions worth of fuel. It is as if they have “extra” RM35 billions of money in hand to spend where necessary. If “k” value is 5, multiply RM35 billions by 5 we will get RM173 billions.

Therefore, RM35 billions fuel subsidy boasts additional production worth of RM173 billions in annual Malaysia’s GDPs. Let say government taxes mere 8pc of RM173 billions. That is 173 X 0.08, equal to RM14 billions.

Therefore, RM35 billions worth of subsidies create two major impacts in economy. First, it creates additional RM173 billions of GDP.

Second, government gets additional RM14 billions tax as “rebate” and the net amount of fuel subsidy actually is RM24 billions instead of RM35 billions. Talk about being competitive and subsidies are in fact one of the best government tools to speed it up.

Active spending, "G", does not permit government to have the luxury as much as subsidies in term of “rebate”. No, unless government starts to impose tax on schools, hospitals, military and the like, and this is highly unlikely.

Subsidies are always of better choice for steady economics growth in long run. Hence, it isn’t fair to focus solely on the real amount spent on subsidies. Instead, what the economy benefited from subsidies for example in term of GDP growth had to be taken into account.

In this view, RM24 billion net fuel subsidies are actually better than to let domestic fuel price fully exposed to open market supply and demand, i.e., to increase fuel price. That is definitely “kamikaze” and we actually are going many steps backward. Please bear in mind, it was becauseof shortcomings and failure of classical thought that Keynes emerged as savior. Later, those with this line of thinking are being called as “Keynesian”economists.

For believing that market forces (supply and demand) will magically adjust everything for the sake of competitiveness, what else can be said? True, what goes up will come down. But in the case of fuel price, once it goes up, it drags the whole general price index of the country along. In capitalist market system, the price may fall in future, but general price index will most likely not, due to a very simple reason – profit maximization placement above social obligation is the businesses mean. At the end, we get only overall nominal increases in GDP and personal income.

As far as the comparison between Malaysia with Singapore and Indonesia, I honestly can’t remember that Malaysia's economy is actually being modeled after them.

I believe Malaysian economists and policy makers always maintain UK and US as economics model base so far. What puzzled me is they don't stick with the duo when it comes to subsidies. They started to compare Malaysia with other countries such as Indonesia, Thailand and Singapore instead. That is terribly lame comparison.

The fact is that, until now USA and UK governments maintain subsidies as an integral part of government spending. Take USA for example, around 13pc (USD367 billion) of 2007 federal government budget is for unemployment and welfare alone, and these are subsidies! The amount is bigger if we calculate all types of subsidies in the budget.

Non economics solutions, instead of purely economics are required if it is all about mindset changes or “paradigm shift”, or for competitiveness reasons.

Change the people mindset, they will not ask for subsidies anymore. But so long government exists and collecting taxes, subsidies are there to stay perpetually, mindset change or not, or, whether people ask or not.

I really wish some good economics responses to prove that my economics understanding for more than two decades IS wrong.

Source: Daily Express Newspaper, 17 Feb 2008, pp.15.

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