A CGE MODEL FOR ASSESSING THE ECONOMY-WIDE EFFECTS OFREMOVING THE COOKING OIL SUBSIDY IN MALAYSIA

The Malaysian government eliminated the subsidy on cooking oil fromJanuary 2017 in its efforts to improve market efficiency and curb thesmuggling of the product into neighboring countries. Implementing thispolicy will impact the economy through changes in relative prices andimprovements in resource allocation. This article simulates the economywideeffects of this policy reform using a computable general equilibriummodel based on the country’s latest input-output tables (2015) under shortand long-run scenarios. The simulation results show that the subsidyremoval substantially increases the price of cooking oil which in turnaffects the prices of other food and agricultural products and causes a mildcontraction in the overall economy. The results also show that in additionto the impact on the cooking oil sector, the oil palm sector is also somewhataffected by this policy as upstream linkages are taken into account in boththe model and database. The Hicksian welfare criterion shows thathousehold welfare decreases marginally as a result of the subsidy removal.JEL Classification: C68, D04, H20