Thursday, June 26, 2008

Mantua On Subsidies

I say it again, Mantua, you should be blogging, you'd be a hit. You certainly write better than me, and not as antsy or sarcastic as me as well. Here's what Mantua wrote on subsidies:

You are right. Price subsidies are found all over the world. They all result in distortions to the smooth operation of the world's free markets but ultimately they all fail.

For many years, US & European farmers received heavy subsidies to keep them afloat. These subsidies allowed them to dump surplus output of cereals, cotton, sugar, etc onto consumer markets worldwide. The resultant low prices resulted in:
1) many farmers in the 3rd world abandoning their farms;
2) mass migration to already overcrowded cities;
3)endless supply of cheap labour to burgeoning new factories;
4) rise of the middle class in newly developed countries
5) increase in demand for food & fuel at just the time when supply has reached its peak.

Same thing with oil. The industrialised West was built on the back of cheap oil supplies from Middle Eastern states or nations whose rulers were encouraged to spend their oil incomes wastefully, making them ever more dependent on further exports to the west.

In spite of their continuous preaching for democracy worldwide, the western powers propped up many non-democratic regimes, notably in Saudi Arabia, Kuwait & Iran (pre-Shah).

The resultant indecently low oil prices led to unsustainably wasteful lifestyles in the west (especially the US) which were mimicked by nations worldwide.

In a sense, we could argue that ALL oil importing nations have been subsidised for many years by cheap oil from the Middle East. Like all forms of subsidies, this situation could not last forever beause:

1) the supply of cheap oil is finite - all the big oilfields have been discovered;
2) the low oil prices discouraged efforts to look for oil elsewhere;
3) sharply rising fuel demand from newly developing countries;
4) increasing democratisation & radicalisation of the Middle Easter & other OPEC nations, who are finally realising they should manage their god-given natural resources less wastefully.

In conclusion, the recent sharp rises in energy & other commodity prices is the natural outcome of decades of wasteful consumption & chronic under-investment in new supply sources.

While speculators have no doubt exacerbated the recent oil price rises, we tend to ignore the underlying cause which is the supply/demand balance.

Although there is sufficient supply today (as argued by OPEC members in their rejection of demands by oil importing nations for increased oil production), the market realises that new & more costly oil supplies take time to come to market & may not satisfy current demand trends.

This trend will keep on rising unless consumers worldwide change their lifestyles drastically or else have it forced on them through severe economic recessions. Especially in the most wasteful (& blinkered) nation of all, the US.

Curb the speculators if you must, but we must all reassess our own lifestyles & assist in curtailing the spread of consumerism worldwide, at least in its current form.

p/s photo: Bai Xin Hui


clk said...

One effect from the recent price hike in M'sia was the reduction in vehicle traffic.

What the KL authority has been trying to do for years, i.e. to reduce traffic and increase usage of public transport without success has indirectly been achieve with the recent price hike. DBKL should now work towards ensuring this is continued in the longer term!

clk said...

What the KL authority has been trying to achieve i.e. reduce vehicle traffic and increase public utilisation of public transport has now been achieved with the recent price hike!

random said...

Another impressive write up mantua. I do look forward to your next comment.

Do you advocate a gradual removal of all subsidies? However there is a question mark so as to whether the monies saved would be put to good use.

lsb said...

The world has changed recently, the exploitation of the poorer countries has diminished somewhat, thus the lessening of the western power. I still remember what my father told me, "The English buy latex from us in cents per ton, and sells us boot in dollars per pairs".

Looking at facts factually.

The European in their conquests massacred off the local communities (North America & Australia), or killed untold numbers (Africa & South America). Others they left a legacy of discords and splintered States (Africa, Middle East, India/Pakistan & M’sia/Singapore).

The Indian, Chinese, Egyptian & South American civilizations have to date never go on a world land grab, and were conquered. The Chinese exerted alliances by marrying off their princesses (the Emperors were not short of supply) to the surrounding nations of the middle kingdom, hence Chinese genes in the Royal houses across Asia, East Europe, & S E Asia.

The heirloom of the British monarchy are loots from all over the world. The diamond on the Crown is from India and the 1 on the staff is from South Africa. Visit the museums of England & U S, its filled with loots and stolen items from all over the world. From Africa, Americas & from Asia particularly India, China, Indonesia, Cambodia, Thailand & M’sia and more.

Which war machine kills the most since World War II, it is the U S. One of the reasons for weapons non proliferations arrangements is to protect the U S armament industry. Weapons sale is the largest component of U S exports. This however does not deny the need for non proliferations arrangements which have a lot of merits.

One of the culture that cannot be conquered is the Chinese culture. Mongol Ghengis Khan conquered China and established Yuan Dynasty (1279), what happened?, the Mongols was culturerised and absorbed and became Chinese. The same happened to the Manchus and the Qing Dynasty (1644). To the American melting pot, China has a slow cooker n cooks all in its own time.

mantua said...

Yes, all subsidies should eventually go but not before corresponding adjustments to all working people's salaries, in effect a gradual rise in income to close the gap with those in developed countries.

Most important, though, is a radical improvement in utilisation of govnmt revenues, as you & Dali rightly point out.

Just imagine what the missing hundreds of billions of $ (recent estimate of losses due to corruption in Malaysia by an external analyst) could have done to advance Malaysia's economy.

I keep telling all my Malaysian friends: "You get the govnmt you deserve - vote wisely!" Look at the big picture & forget the silly prejudices you've been spoon-fed by BN over the last 50 years & your personal prejudices.

Do you not have better opposition candidates than those who are unwilling to wear the designated formal wear in the presence of Royalty?

Or his silly leader who shot from the hip as soon as the Sultan of Perak made his choice for the new MB. Did it not enter his mind that the selection was made entirely on merit? Anyway, I'm digressing & it's all history now. But it does emphasize the fact that you DO get the govnmt you deserve!

mantua said...

Something totally unrelated.


What's your opinion on Hiaptek. Its quarterly report issued yesterday showed EPS of 14cts. No exceptional profits, just much improved margins due to recent approval to produce steel pipes for oil industry.

It also seeking approval for 10-year pioneer tax status which could generate additional increase in net earnings.

At annualised EPS of 50-60c, P/E ratio seems way too low. I exited a few months ago at 178 but tempted to re-enter at current levels around 165 in spite of current bearish sentiments.

mantua said...

I would be glad to attach a price chart with technical indicators & comments which might interest you & your readers. How do I do that?

Very simple stuff, I assure you. I'm not a die-hard believer in technical analysis but use it to complement every other form of analysis (including your comments!)

Salvatore_Dali said...


i get quite a number of requests to review a stock... had a look at hiapteck, i think u can safely buy for short or medium term... will post a write up soon... as for charts, send me the file/jpg

mantua said...

Sorry, how can I do that? Cannot find yr email adrress.

Salvatore_Dali said...


is that name a play on Old Man?

the email add is on the left column write up:

mantua said...

I've been asked that question before,lol.

No, it's the street name of my 1st home in Perth, Australia.

Seng said...

My 2 sen worth.

I definitely agree, that there is never a good ECONOMIC reason for any subsidy. There are so many economic studies such as the few ones highlighted by mantua that shows that subsidies have distortive effects as well as promoting inefficiencies, that from an overall economic perspective, it is a sub-optimal decision.

So, in the real world, when we see something which is subsidized (such as fuel in Malaysia), I believe the original reasons to subsidize are almost always non-economic reasons. It may be political reasons (e.g. to show a low inflation rate when global crude oil price first rose), or social welfare reasons (so as not to burden the poor), or for some other rational reasons (we hope) or for a combination of reasons.

And therein lies the practical difficulty in deciding whether a specific subsidy in a specific country at a specific time should be removed or not, and how it should be removed, whether gradual or one time, or over what period, etc.

And then there is also the critical and practical issue of whether the government can be relied upon to make better use of the savings from reducing / eliminating the subsidy. There's no point if after removing the subsidy, they misspent it.

And then, there is a phrase that there is always the right time for everything. Some things must happen first before other things can happen, else it is sub-optimal. As they say, First Things First.

In the case of Malaysia's fuel hike, my own personal opinion is that it is simply a wrong time to reduce the subsidy in so large a manner on June 5. I of course don't have a high opinion of the present government.

It was not a case of First Things First.

The impact on the poor unfortunately is now worse today. I haven't really seen to date any real effective safety nets given to the poor. The $625 rebates is only a tiny fraction of the subsidy, and is practically ineffective for the vast majority of poor Malaysians.

And the way the savings are used is also not transparent. Instead, the savings have been used to increase the 9MP budget allocations in a most untransparent manner in my opinion. Unfortunately, this means there is now greater opportunity for MPs to do more of what they've been doing before over the past 50 years. I have grave doubts whether this is going to be in the best interest of Rakyat. Ask any Tom, Dick and Harry earnestly on the street and the braver ones will bluntly say this is more corruption opportunities, which is sad.