The fuel price hike and the flak resulting from it was a case of 'good economics but bad politics' which could have been alleviated had the authorities modified their approach, said the Malaysian Institute of Economic Research (Mier).

Defending the government's 30 sen reduction of subsidies per litre for petrol and diesel two weeks ago, Mier executive director Mohamed Ariff said subsidies are economically unsound causing under-pricing and over-consumption.

With the latest hike in fuel prices Malaysian prices are still lower than that in some neighbouring countries, said Ariff, adding that even if world oil prices were to decline, there should be no reduction of pump prices within the country, a net oil exporter.

"So I think it is important that consumers pay a price that conforms to the costs of producing the good or service," said Ariff.

"(However), this time around, it was done very suddenly. There was a 20 percent increase, and that, I think, was too much for the system to adjust to," said Ariff.

He said this after presenting a review of the United Nations' annual 'Economic and Social Survey of Asia and the Pacific 2006' at the United Nations office in Kuala Lumpur.

Ariff said that the government's hike in fuel price, which he termed a 'politically bold move', would force the market to look for other cheaper alternatives and consumers to 'be more frugal in energy consumption'.

Exchange rate policy

Citing the UN survey report, Ariff also described Malaysia's cut in oil subsidies as one of last year's two most significant economic policy decisions.

The other significant decision was the abandonment of the fixed exchange rate policy in favour of a managed float against a basket of currencies.

"The opportunity cost of the subsidy and concessions in terms of development expenditure foregone appears to be considerable, particularly in view of the estimated 7.7% annual growth estimated required to achieve Malaysia's Vision 2020 goals," he said.

The government had previously reduced subsidies for petrol and diesel by 40 sen, but this was achieved over a period of two years and in three stages.

The overnight action on Feb 28 to increase fuel prices has led to a considerable public backlash, including demonstrations within peninsular and East Malaysia.

Twenty-two protestors were arrested during the last gathering at the Petronas Twin Towers last Sunday, the largest number of arrests since the reformasi demonstrations of the late 1990s and early 2000s.

Unemployment crisis

Earlier, in his opening address when launching the UN report, UN resident coordinator and representative for Malaysia, Singapore and Brunei, Richard Leete, highlighted Malaysia's crisis of unemployment among university graduates.

"Despite Malaysia's impressive record in employment, the unemployed rate among persons aged 20-24 has risen markedly since 2000, and is now around ten percent," noted Leete.

"Of particular concern is the rising level of unemployment among Malaysians with tertiary education, which in 2004 for the first time ever, was at a higher level for Malaysian graduates than for those with secondary or primary educational attainment," he added.

He later said the problem indicated the need to reconcile the needs of the market with the education system currently found at the tertiary level.

Among the other highlights of the report was the high rate of savings in Malaysia, which at 44.5 percent, was more than twice as large as investment.

"Foreign exchange reserves more than (doubled) from RM34 billion in 2002 to over RM70 billion by December 2005," pointed out Ariff.

He said the survey drew on the need for Malaysia to 'be prepared to face increased competition from China and the need to find new sources of growth to remain competitive'.