OCTOBER 21 — I do have complaints about various government policies but I do see improvement on this front at the federal level in the past few years. Two policies I am largely in agreement with and am advocating are the subsidy cuts and in its place the subsidy, the cash transfer program.

After all the progress made however, my fear is that the government is losing its focus and it is taking a step backward or two. I will take such reversal as a betrayal to the earlier promise of economic reforms.

Prime Minister Datuk Seri Najib Razak launches the national-level 1Malaysia People's Aid (BR1M) 2014 at SMK Aminuddin Baki, Kampung Pandan, Kuala Lumpur February 22, 2014. — Picture by Saw Siow Feng

Economic reforms under threat

I write so because the government plans to introduce a complicated quota system for subsidised petrol and diesel in place of the current blanket subsidy system, which given the current global crude oil prices, is at the brink of elimination. This is good news but now the government wants to maintain the subsidy instead. It just cannot make up its mind.

Under the new convoluted system, each person would get some quota of subsidized fuel based on his or her income in the name of targeted policy: the higher your income, the fewer quotas you would get. Any consumption above the quota would be charged at market price. Full details have not been released yet but during the tabling of the federal government’s budget, the Prime Minister said he would announce the mechanism soon.

What makes the situation worse is that the government also plans to limit the cash transfer program we all know as Bantuan Rakyat 1Malaysia (BR1M) by restricting items that can be purchased by the program’s beneficiaries. The government is supposedly concerned that the recipients would abuse the cash from the program by buying luxury goods, like iPhone 6 that a certain Minister is using now. After all the speech about the days of government knows best is over by the Prime Minister when he first took power, here, the minister Ahmad Maslan is showing the government’s paternalistic side by attempting to dictate a person’s consumption pattern right up to the minute details.

I disagree with both proposals because they are bad policy. I would prefer the government to stick with a superior pure subsidy cut-cash transfer mix instead.

Quotas and coupons are inferior policies

The only way I can think of to make such consumption control preferred by the minister possible is by converting the cash under BR1M into some kind of coupons. I am struggling to think of any other way to make such paternalistic policy possible. Maybe that is my imagination failure, but I would imagine any other way would be unnecessarily more complicated than the coupon setup, which is already completed, opening it to risk of abuse.

Why? The recipients can sell the coupon at a discounted price to get cash instead of buying items approved through the coupons. And what prevents them from using that cash to buy luxury goods? As you can see, it is a complicated system that reduces the potential amount received by the targeted person and prevents nothing to address the minister’s paternalism, assuming his paternalism is right in the first place.

Meanwhile, the benefits meant for specific group get leaked to the unqualified others through the discount. How about a concrete example? It has happened with the 1Malaysia Book Voucher program where students did exactly that: they sold their vouchers at a discount for cash.

The same argument is also applicable to the quota system for subsidized fuel. What prevents a quota holder for selling his or her fuel to others at some price higher than the subsidized price but lower than market price? There is nothing “targeted” about it.

Monitoring might be the key to the success of such system but with the government trying to balance its budget, does it make sense to create a whole new bureaucracy to police the effectiveness of the complicated regime?

Furthermore, the coupon system would require distributors. Just who will be the distributors, one might ask? The government would likely outsource it to someone else in private sector given that there are millions of households are already benefiting from the cash transfer program BR1M. And with all the complicated supply chain of vouchers, who knows what would happen to them. Some money things can go wrong. Why creates an opportunity for corruption in the first place?

If one wants a clean targeted policy, then one would only need to wire in the necessary cash directly into the recipient’s account. It is precise, easy and clean. No third party handles the cash, leaving little room for abuse. And we already have that system in place. Why change things that work?

A regression of policy

Subsidy cut and cash transfer work. They work charmingly and that is enough. The proposed quota-coupon policy will instead undo the success of the subsidy cut-cash transfer policy by complicating everything.

If indeed these the quota-coupon policies mix will be implemented, then I would see this as a regression. It is a policy U-turn. The maintenance of the subsidy system will preserve the very inefficient system that the government wanted to get rid in the first place while the introduction of a coupon system introduces other kinds of inefficiency.

We are already on the path to a superior policy-mix compared to the one we had before. I would go further by arguing that the logical end of the current mix is the best one given the objectives of creating a more efficient market, lowering the fiscal deficit and at least preserving – it can even be enhancing – the welfare of Malaysian most affected by the cuts and elimination of subsidies.

Remember the cash transfer rationale

It must be remembered that both subsidy cuts and cash transfer should be seen side by side. They are not independent of each other. The cash transfer is meant to address the negative impacts of subsidy cuts, making the cuts more palatable. The cuts meanwhile finance the cash transfer.

If the government reduces the efficacy of the cash transfer by taking the cash element away, then whatever remains of the system will be unable to play its role as a cushion at its highest potential for the financially weakest households. At the same time, if the subsidy is being maintained, then we should not increase the cash transfer. I would even say that the maintenance of subsidies calls into question the existence of the cash transfer program in the first place.

The Prime Minister during the budget suggested that the revenue raised from the goods and services tax will finance BR1M in 2015. That is a really a dangerous statement that upends the ties between the subsidy cuts and the cash transfer. Maybe this is a sign that the government is getting itself confused about the rationale for its cash transfer program, which can explain why we are starting to see economic reforms losing steam as various inferior policies proposed at the expense of superior ones.

Don’t fix it if it ain’t broken

My advice to the government is to press on with its earlier economic reforms. Ditch the inferior quota-coupon mix. Maintain current policy. Press on by floating all fuel prices. We can move on to LPG subsidies once the business with petrol and diesel is done. Maintain and improve the cash transfer program. Do not change the cash nature of the program. Increase it whenever subsidy cuts save more.

Just no to quota. No to coupon. And no to Ahmad Maslan’s paternalism.

The government has all the political capital it needs to press on with the reforms. The general election is still so far away. All the political criticism against BR1M can easily be dismissed. And BR1M is a cheaper and better kind of populism backed by good economics compared to subsidies and all those complicated policy. What is not to like?

It would be a great shame if by 2017-2018, all the political capital the government has now is wasted on half-measures.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malay Mail Online.