Malaysiakini Letter

Subsidies don't counter inflation, they just hide it

Low Yih Feng  |  Published:  |  Modified:

I refer to your original report Gov't to delay projects amid rising costs .

I have always thought that subsidies are the dumbest possible way of countering inflation. Yet it is obviously the easiest, and the average Malaysian is incredibly happy when the government announces subsidies.

What the average Malaysian doesn't understand is that prices are still rising. And they are just paying for it with their tax money. They live in an illusion that prices remain low, while they are paying extra not only for the items that are subsidised, but also for all the officers, offices, paperwork and information systems needed to be in place to regulate such subsidies.

And political parties seem keen to give out such subsidies, since it is an extremely easy way (don't actually have to use their brains), and the rakyat rejoices.

Such subsidies aren't countering inflation. They are just hiding the inflation. The rakyat still pays (and pays even more) for the items. And precious cash that should go towards healthcare, education, defence, development etc. are all wasted in tricking everyone into believing that all is good.

And how long will this go on for? Prices are always going to rise over the long term. Does the government just keep providing more and more subsidies until the treasury is dry?

So yes, when it was revealed that the government ran short of funds for development, I wasn't surprised.

While I am no professional economist (and, in fact, never studied economics before), I do understand that the market works in a balance of supply and demand. When supply outstrips demand, prices goes down and deflation occurs. When demand outstrips supply (what's happening currently), inflation occurs.

So instead of providing subsidies, maybe the government should attempt to fight inflation some other way? In Australia, the Reserve Bank raises official interest rates to make access to money more expensive.

And true enough, when people have less money to spend, demand drops, inflation drops. Or how about looking for more supply? Malaysia has plenty of fertile land that are perfectly capable of producing rice, vegetables and many other essential goods. I would much rather see our tax money channeled to developing our agriculture industry than towards subsidising stuff.

Sadly, it seems the vast majority of ministers are either less informed than me, a lowly common person with no economics background, or simply do not care about the country.

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