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Fuel Subsidy Abolition and Performance of the Sectors in Malaysia: A Computable General Equilibrium Approach

Author

Listed:
  • Sze Ying Loo

    (School of Economics, Finance and Banking, College of Business, Universiti Utara Malaysia)

  • Mukaramah Harun

    (School of Economics, Finance and Banking, College of Business, Universiti Utara Malaysia)

Abstract

The attempt of abolishing fuel subsidy to alleviate the rising pressure on public finances would pose a threat to the performance of the sectors. This study, therefore, intends to identify the impact of abolishing the subsidies on domestic producers in Malaysia using a Lofgren-based computable general equilibrium (CGE) model. The findings show that the fuel subsidy abolition leads to a significant fall in the level of production, and consequently decreases output allocation for domestic and export markets. Sectors which use relatively large amounts of oil products in production would most likely be hit harder. Besides simulating the impact of abolishing the fuel subsidies, two supplementary regimes (reallocating the extra savings to the agricultural sector to assist the rural poor and transferring direct cash to those who are in need) are incorporated to deal with the decelerating growth in domestic production. Interestingly, raising agricultural investment is found to be more favourable in terms of better performance in the growth of the sector. Thus, it is advisable to include improvement of farming practices in designing policy measures. This study can further serve as a guideline in upgrading the existing subsidy abolition to ensure the performance of the sectors is wholly satisfactory.

Suggested Citation

  • Sze Ying Loo & Mukaramah Harun, 2019. "Fuel Subsidy Abolition and Performance of the Sectors in Malaysia: A Computable General Equilibrium Approach," Malaysian Journal of Economic Studies, Faculty of Business and Economics, University of Malaya & Malaysian Economic Association, vol. 56(2), pages 303-326, December.
  • Handle: RePEc:mjr:journl:v:56:y:2019:i:2:p:303-326
    DOI: 10.22452/MJES.vol56no2.7
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    Cited by:

    1. Eddy Prabowo & Harianto & Bambang Juanda & Dikky Indrawan, 2022. "The Economic Price of Liquid Petroleum Gas, Poverty and Subsidy Removal Compensation Scenario in Indonesia," International Journal of Energy Economics and Policy, Econjournals, vol. 12(5), pages 169-177, September.

    More about this item

    Keywords

    Agricultural investment; computable general equilibrium model; direct cash transfer; fuel subsidy abolition; output productivity;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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