Impacts of energy subsidy reform on poverty and income inequality in Malaysia

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.