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Let’s review our subsidy policy so we can combat smuggling

By June 29, 2021November 1st, 2023No Comments

Policymakers, especially civil servants, need to weigh the costs and benefits of any public policy decision, especially price support, price subsidy and price control. – NSTP file pic

A COMMENTARY about smuggling by Datuk Seri Akhbar Satar on June 26 has encouraged me to pen this article. Smuggling is a security concern. It is also a public policy matter because it involves a pricing policy intervention.

While the total worth of smuggling into and out of Malaysia is not known, the quantum is sizeable given the high price differential for commodities, such as petrol and rice, between the country and its neighbours.

Smuggling occurs when operators or smugglers see the potential of making a significant profit from relative price differential across borders, having calculated the costs of undertaking it, including threats to life and property.

It is rewarding because they take advantage of price differential artificially created by subsidies or taxes on certain commodities.

Price subsidies will bring prices down in one region, making it advantageous to smuggle into areas where the prices are higher.

Similarly, smugglers will smuggle in a commodity if its price is higher due to price support or the tax levied upon it.

For example, rice is cheaper in Thailand but much more expensive in Malaysia due to price support of the commodity in this country. Thus, rice is smuggled into Malaysia.

Similarly, our subsidy for petroleum products lead to lower price levels at home, much lower than prices in neighbouring areas. It allows smugglers to smuggle them out to countries where prices are higher.

Our policy responses are largely security-related, by putting enforcement personnel to patrol potential areas of smuggling, such as along Sungai Golok, which separates Thailand and Malaysia. These can be very costly.

Smuggling give rise to rice cartels. The forces of supply and demand for rice have been so predictable that the unhealthy market practices of smuggling, cartel and collusion have evolved to become a permanent feature in the marketplace.

Mounting a large enforcement team can be costly and runs the risk of death during a crossfire between smugglers and enforcers. This happened recently along the Malaysian-Thai border, creating cross-border tension.

Policymakers, especially civil servants, need to weigh the costs and benefits of any public policy decision, especially price support, price subsidy and price control.

Resource allocation will become more efficient by not including traded goods and services under price subsidies and support.

They are bound to lead to smuggling, especially if the price difference between domestic and international prices is high. The price difference should be minimal.

Better still is not to meddle with the pricing system as much as possible. Instead, non-traded essentials and basic necessities, such as housing, public education and health, should receive more subsidies.

We have provided price support for padi for so long and also subsidies for petroleum products. To curb smuggling, these subsidies need to undergo review so they can be reduced and done away with.

However, if assist we must, then affected padi farmers can instead receive health and education and housing assistance. If need be, we can aid them with a subsidy in production input while maintaining the domestic price level close to international ones. Their net income is still about the same.

Equally, a subsidy for petroleum products can only be given if we minimise the leakages significantly, such as by having a targeted subsidy scheme. The above indicates the importance of reviewing our public policy stance in areas of concern, especially smuggling.