Malaysia pays a great share of its gross domestic product on energy subsidies. Payment of subsidies causes some failures in the economy, such as disrupting the price mechanism and destroying allocation of resources in the economy. Removing these subsidies has important implication for sustainable development through their effects on energy consumption, price system, resource allocation and emission. This study employs a computable general equilibrium model, which is a more comprehensive method than statistical and econometric methods, to identify the long-run impacts of energy subsidy reform in the Malaysian economy, especially on poverty and income inequality across four Malaysian ethnic groups, namely Malay, Chinese, Indian, Other in both rural and urban areas, and one noncitizen household. The results of this study indicate that urban households are set to lose most from energy subsidy reform compared to rural and noncitizen households due to increased expenditure. In addition, Malay households, particularly in urban areas, lose more significantly than other household groups. This policy leads to initial increases in the overall inequality in the economy, but the increase in inequality in urban areas is greater than rural areas.
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Malay is an ethnic group of Austronesian people predominantly inhabiting the Malay Peninsula and coastal Sarawak and Sabah and other Malaysia’s neighbour countries. Chinese is an ethnic group that most are the descendants of Chinese who immigrated to Malaysia between the early and the mid-twentieth centuries. Indians are Malaysians of Indian origin. Many are descendants from those who migrated from India during the British colonization of Malaya. Noncitizen households are non-Malaysian people who had stayed or intended to stay in Malaysia for 6 months or more (Department of Statistics 2009). Other is a group of Malaysian population that is not classified as Malay, Chinese, Indian and noncitizen such as Orang Asli.
A household is considered poor if its income is less than its Poverty Line Index (Department of Statistics 2012).
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 groups of a population with upper group (Freguja 2013).
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See Table 7.
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Solaymani, S. Impacts of energy subsidy reform on poverty and income inequality in Malaysia. Qual Quant 50, 2707–2723 (2016). https://doi.org/10.1007/s11135-015-0284-z