A CGE Model for Assessing the Economy-Wide Effects of Removing the Cooking Oil Subsidy in Malaysia
The Malaysian government eliminated the subsidy on cooking oil from January 2017 in its efforts to improve market efficiency and curb the smuggling of the product into neighboring countries. Implementing this policy will impact the economy through changes in relative prices and improvements in resource allocation. This article simulates the economy-wide effects of this policy reform using a computable general equilibrium model based on the country’s latest input-output tables (2015) under short and long-run scenarios. The simulation results show that the subsidy removal substantially increases the price of cooking oil which in turn affects the prices of other food and agricultural products and causes a mild contraction in the overall economy. The results also show that in addition to the impact on the cooking oil sector, the oil palm sector is also somewhat affected by this policy as upstream linkages are taken into account in both the model and database. The Hicksian welfare criterion shows that household welfare decreases marginally as a result of the subsidy removal.
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