Is There a Case for Fuel Subsidy Removal in Malaysia?

Nor Azam Abdul Razak, Russayani Ismail, Roslan Abdul Hakim

Abstract


This paper examines the indirect welfare effect of removing fuel subsidy on the Malaysian households. The analysis is based on the price-shifting model developed by Coady and Newhouse (2006) and carried out using the data from the Household Expenditure Survey 2004-2005 and the input-output table 2004-2005. The analysis yields the following key results: a) The removal of fuel subsidy is expected to have a relatively huge indirect welfare effect on the society; b) The indirect welfare effect is expected to be uneven across different broad categories of goods (of which the most affected ones are: i) Food and Non-Alcoholic Beverages, ii) Housing, Water and Electricity; and iii) Transportation); and c) The indirect welfare effect is expected to be uniform across different income-based segments of households. Overall, the findings seem to constitute a case against fuel subsidy removal unless the adverse impact on the three categories of goods is mitigated in some way.


Keywords


Fuel subsidy; Indirect welfare effect; Malaysia; Subsidy removal.

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References


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DOI: http://dx.doi.org/10.18533/jefs.v2i03.54

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