Fuel Subsidy Rationalisation: The Perils of the Middle Class in Malaysia

Roslan Hakim (), Othman Yeop Abdullah, Russayani binti Ismail () and Nor Azam Abdul Razak ()
Additional contact information
Roslan Hakim: Graduate School of Business Universiti Utara Malaysia 06010 UUM Sintok, Kedah Darul Aman MALAYSIA
Othman Yeop Abdullah: Graduate School of Business Universiti Utara Malaysia 06010 UUM Sintok, Kedah Darul Aman MALAYSIA
Russayani binti Ismail: School of Economics Finance and Banking Universiti Utara Malaysia 06010 UUM Sintok, Kedah Darul Aman MALAYSIA
Nor Azam Abdul Razak: School of Economics Finance and Banking Universiti Utara Malaysia 06010 UUM Sintok, Kedah Darul Aman MALAYSIA

Jurnal Ekonomi Malaysia, 2014, vol. 48, issue 2, 83-97

Abstract: The middle-class is reported to experience the “middle-class squeeze†, where they are facing a declining relative income and simultaneously rising costs of living particularly with regards to housing, education and health care. Besides, the middle-class is also reported to face “the middle-class trap†, where on the one hand, they are regarded as “too rich†to qualify for any government support, but on the other hand, they found themselves in reality “not too rich†to sustain their lives without facing hardships. These observations unfortunately seem to be equally true in Malaysia, which raises the need to scrutinise the likely impact of government policy on the middle-class. With the recent fuel subsidy rationalisation in Malaysia, this paper attempts to analyse the likely welfare impact of this policy towards the middle-class in the Malaysian society. Examining this issue is crucial and desirable since the problems faced by the middle-class tend to be overlooked by the policy makers. In our analysis, we use various definitions of “middle-class†as suggested in the literature, and examine the direct, indirect and the total welfare effects of fuel subsidy removal on them using data from the Household Expenditure Survey (HES) 2004/2005 as well as the Input-Output Table for 2004/2005. Our findings reveal that, in line with the common perception, the benefits of fuel subsidy accrued mostly to the rich. Ironically, the costs of subsidy removal are borne mostly by the middle-class in terms of the direct welfare effect. Yet in terms of the indirect welfare effect, the costs of subsidy removal are borne equally by the middle-class as well as the lower and the upper class. Since the indirect welfare effect outweighs the direct welfare effect, we conclude that while the rich get most of the benefits from fuel subsidy, its removal hurts the middle-class the most. Our finding implies that fuel subsidy rationalisation must be followed by a practical strategy and program to lessen the negative impact of fuel subsidy removal not only for the poor, but also for the middle-class as well.

Keywords: Fuel subsidy; Malaysia; Middle-class; welfare effect (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.ukm.my/jem/wp-content/uploads/2021/06/jeko_482-8.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ukm:jlekon:v:48:y:2014:i:2:p:83-97

Access Statistics for this article

More articles in Jurnal Ekonomi Malaysia from Faculty of Economics and Business, Universiti Kebangsaan Malaysia Contact information at EDIRC.
Bibliographic data for series maintained by Muhammad Asri Abd Ghani ().