Evaluating the Role of Subsidy Reform in Addressing Poverty Levels in Malaysia: A CGE Poverty Framework

Abstract

Malaysia as one of the top subsidised countries around the world has launched to reduce subsidies to capture its development goals. This study, therefore, analyses the effects of the subsidy reform on the macroeconomic, welfare and poverty levels of Malaysia by applying a CGE model. The findings suggest that subsidy removal leads to significant falls in both income and consumption of rural, urban and non-citizen households, and consequently decreases their welfare. However, poverty levels among rural households will most likely increase significantly when compared to urban households due to their relatively low level of income compared to other groups.

Acknowledgments

The authors gratefully acknowledge the financial support from the Ministry of Education of Malaysia under the grant No. ER007/2011A, entitled “Reconstructing the Malaysian Poverty Index”. We would also like to thank the four anonymous referees the Editor-in-Chief for their helpful suggestions and corrections on the earlier draft of our paper according to which the content was enhanced.

Notes

^1. Liner expenditure system (LES).

^2. The DAD software measures the poverty and welfare indices of all households in the model. For this calculation, it uses both the estimated poverty lines from the CGE model, for each household type, and 192 households’ monthly income data, for each household type (totally 576 households’ income data), from the 2004 Household Income and Expenditure Survey.

^3. Absolute poverty measures the poverty level of households living below minimum, socially acceptable living conditions, usually established based on nutritional requirements and other necessary goods. However, relative poverty compares the lowest group of a population with the upper group (Makoka & Kaplan, 2005).

^4. ‘The difference between the Sen and the FGT measure is that Sen (1976) used “rank weights” which were determined by the number of households between a given poor household and the poverty line. The FGT index, on the other hand, used the actual proportionate income shortfall of a poor household, raised to the power of α’ (Borooah, 2010, p. 6). The theory of Watts index, which is one of the earliest measures of poverty, has been considered as having favourable theoretical properties, although it is not as widely used as the FGT class of poverty indices (Simler & Arndt, 2006).

^5. Constant elasticity of transformation.