Southeast Asia Scales Down on Subsidies

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Southeast Asia Scales Down on Subsidies

Thailand, the Philippines and Indonesia have recently downgraded key subsidies. Public response is mixed.

Several Southeast Asian countries have begun scaling down the subsidies they are providing to key sectors of their economies. Last month, the Thai government confirmed that it will soon decrease the rice price subsidy it gives to farmers. In Indonesia, the parliament approved a revised budget that lowered the fuel subsidy. Meanwhile, in the Philippines' Transportation and Communications chief advised Metro Manila train commuters to prepare for a fare hike since the government will reduce the subsidy for the mass transit service. 

Introduced in 2011 after the electoral victory of Prime Minister Yingluck Shinawatra, Thailand’s rice pledging program involved the government’s purchase of local farmers’ rice output at a high price before reselling it on the global market. The program was meant to increase the savings of farmers and boost rural spending. But after two years, the program has already incurred a loss of $4.4 billion and caused Thailand to be overtaken by Vietnam and India, which is now the world’s largest rice exporter.

Meanwhile, Indonesia’s revised budget would raise premium gasoline prices by 44 percent and diesel fuel prices by 22 percent. It is the first fuel price increase since 2008. The government spent 20 billion US dollars on fuel subsidies in 2012 to provide cheap fuel to its people but it also worsened the country’s budget deficit problem.

Every year, the Philippine government spends about 7 billion pesos to subsidize the operation of Metro Manila’s three major railways, making train fares very cheap. Arguing that the big subsidy is no longer sustainable and is unfair to Filipino taxpayers who are not using the train service, the government said it is time to remove the train subsidy and raise ticket prices. The plan is to then use the savings to invest in other vital services.

Subsidy programs may be popular, especially among poor voters, but they are generally disdained and discouraged by economists. Critics of Thailand’s rice buying scheme have pointed out that middlemen and rice traders, and not poor farmers, are the ones benefiting from the subsidy. Likewise, Indonesia’s generous fuel subsidies are reportedly subsidizing the lifestyle of middle-class car owners instead of the basic needs of the working poor.

Subsidies are controversial because people tend to react strongly if they are suddenly removed. Subsidy reductions can ignite mass protests like last year’s violent riots in Indonesia which forced the government to cancel its plan to raise fuel prices. Fortunately, no riots erupted in the streets of Jakarta last month. It seems the government’s pledge to distribute cash handouts to 15 million poor households has appeased consumers. But the social impact of higher fuel prices, especially on inflation in the coming months, could affect the chances of the ruling party in next year’s general elections. 

Meanwhile, Thailand’s decision to merely reduce the subsidy price it offers to four million rice farmers, instead of totally scrapping the program, was perhaps meant to serve two functions. The move was likely meant to stabilize its global credit rating on one hand and assure its poor constituents of continued government support on the other. 

Anticipating public anger over the planned train fare hikes, the Philippine government has vowed to hold several consultations with affected stakeholders in the coming weeks.

Public debates over the subsidy programs are expected to continue. In Thailand, the government claimed that its rice pledging program has alleviated the debt burden of farmers. Its supporters added that compared to the farm subsidies of developed nations, Thailand’s rice subsidy is lower and more economically viable. 

In the Philippines, the government assured the public that the increase in prices would lead to the upgrading and modernization of train operations. But activists warned that the government plan would only jack up the profits of private corporations.