Subsidies may hamper economic growth
The Star
Friday March 28, 2008
KUALA LUMPUR: Malaysia may see slower economic growth should the Government continue to subsidise fuel and other basic items in an environment of rising commodity prices, said Institute of Strategic and International Studies director-general Dr Mahani Zainal Abidin.
“There is always a trade-off between economic growth and subsidies,” she said at the launch of the Economic and Social Survey of Asia and the Pacific 2008 yesterday.
Dr Mahani said the sharp increase in subsidies as a result of higher commodity prices would utilise more resources that could have been put to better use to generate economic growth.
However, the Government would have to spend more on subsidies as commodity prices escalated, and hence find that it would have to prioritise when it came to public projects, she said.
“The policy of controlling inflation (via subsidy) will be unfavourable to growth.”
Dr Mahani expects domestic economic growth to moderate to 5.8% this year against 6.3% in 2007, mainly driven by domestic demand and exports to emerging markets.
She said, however, that inflation was a growing concern as inflationary pressure would erode consumers’ purchasing power. When food prices spiral, consumers would spend less on other items that they could previously afford, she added.
“The high crude oil and CPO prices are actually a double-edged sword for
Dr Mahani, who sees a potential slowdown in consumer spending, suggested that policy makers encourage private investments so that it could be a growth engine for the country’s economy.
The survey forecast inflation of 2.8% this year compared with 2% last year.
“Rising fuel and food prices not only present an inflation challenge, but are also increasingly fiscal risks.
“This is despite the fact that
