Impacts of Fuel Subsidy Rationalization on Sectoral Output and Employment in Malaysia

Large allocations for fuel subsidies have long put the Government of Malaysia’s budget under great strain. Using a computable general equilibrium (CGE) model, this paper evaluates the impact of fuel subsidy rationalization on sectoral output and employment. Employment is classified into occupational...

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Bibliographic Details
Published in:Asian development review 2022-03, Vol.39 (1), p.315-348
Main Authors: SULAIMAN, NOORASIAH, HARUN, MUKARAMAH, YUSUF, ARIEF ANSHORY
Format: Article
Language:English
Subjects:
computable general equilibrium model
employment
fuel subsidy
sectoral output
subsidy removal
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Summary:Large allocations for fuel subsidies have long put the Government of Malaysia’s budget under great strain. Using a computable general equilibrium (CGE) model, this paper evaluates the impact of fuel subsidy rationalization on sectoral output and employment. Employment is classified into occupational categories and skill levels. Fuel subsidies were measured using the disaggregation of prices for petrol, diesel, and other fuel products. Findings show that removing fuel subsidies would hit economic performance through high input costs, specifically for industries closely attached to the petroleum refinery sector. The manufacturing sector has the largest reduction in output and employment. Nevertheless, high- and medium-skilled labor forces experience increased demand. To increase economic efficiency, the savings from the removal of fuel subsidies should be put toward policies such as sales tax reduction. This study provides useful information for policy makers in evaluating or updating current subsidy policies to reduce economic losses.
ISSN:0116-1105
1996-7241
DOI:10.1142/S0116110522500081