PADDY SUBSIDY IN MALAYSIA

Malaysian paddy and rice industry has always been given special treatment based on the strategic importance of rice as a staple food commodity. This study attempts to simulate the impacts of changes in government intervention policy, namely the fertilizer subsidy on the Malaysian paddy and rice industry using system dynamics model. Simulation result indicates that fertilizer subsidy does give a significant impact to the paddy and rice industry. Fertilizer subsidy increases the yield obtained and hence increase paddy production. The removal of fertilizer subsidy decreased the paddy production and consequently, decrease the Self Sufficiency Level (SSL). With the removal of fertilizer subsidy the importation of rice seem inevitable due to the reduction in productions. Meantime the growth in population will further put a pressure to the government to increase importation and to find alternative policies to sustain production and to increase yield.

Rice has been a staple food of the Malaysian community and the paddy/rice industry is considered as a strategic industry and always gets special treatment from the government. Plain Rice, Nasi Lemak, Nasi Goreng, Nasi Kukus, Nasi Kerabu, Nasi Beriyani among popular rice served in Malaysia (See photo next).The rice industry is heavily regulated because of its social, political and economic importance. In 2009 apart from being the main source of food, it also provides the livelihood to 172,000 paddy farmers in the country. Land utilization for paddy production is currently at 674,928 hectares which is 76 percent in Peninsular Malaysia (515,657 ha) while in East Malaysia of Sarawak and Sabah accounted for 18 percent (118,919 ha) and 6 percent (40,352 ha) of the total area hectareage respectively. The complexity of the paddy/rice industry makes planning and policy formulation is not an easy task. For example the instability in rice prices in world market which occur in early 1970, middle of 1980 and recently in 2008 give a big negative impact to the industry. Besides, paddy/rice industry is also the most highly protected industry in the country. There are three types of government interventions, these are: import restriction or quota, fertilizer subsidies and price supports. With trade liberalization, the allowable policy instruments to continue supporting and subsidizing the industry will be limited. Thus, it will have some impact to the industry if the trade liberalization is fully implemented. The changes in the government policy such as the removal of fertilizer subsidy for paddy production due to trade liberalization may give negative impacts to the paddy/rice industry.

This scenario may lead to the reduction in rice production, decreased in the case of self sufficiency level (SSL) and increase in import. This study attempts to simulate the impacts of changes in government intervention policy, namely the Fertilizer Subsidy on the Malaysian paddy and rice industry using system dynamics model. Studies have shown that inputs subsidies such as fertilizer help to maintain the productivity of the paddy farm. For example rice producers in India continued to benefit from high government subsidies on inputs in particular fertilizers and irrigation, but also from procurement at minimum support prices. These subsidies lead to the increase in production. Similarly supporting elements ranging from provision of agricultural inputs for rice production such as increasing fertilizer supply, provision of good quality seed, credit with low interest rate played significant role in providing basic support to increase productivity, improving rice quality and minimizing losses in Indonesia.  All these intervention contributed greatly to Indonesia’s self sufficiency in paddy and rice production. Similarly as above indicate that among the factors affecting the increasing gap between production and consumption of rice include input subsidies, credit programs, guaranteed price, distribution of coupons, and the importing of rice using foreign exchange valued at a special cheap rate allocated for food.

Reference above conducted a study on the Indonesia rice supply performance in trade liberalization era. The objective of the study was to analyze the impact of free trade and its consequences to the Indonesian rice economy. They used simultaneous regression analysis (two-stage least square method) to analyze the impact of free trade to the rice economy. They found that removal of import tariff and government involvement will significantly reduce producer surplus. Reference [6] conducted a study on maize trade liberalization versus fertilizer subsidies in Tanzania. They used computable general equilibrium model (CGE) in order to evaluate two policy measures meant to stimulate growth and crop production in Tanzania. The simulation results indicate that fertilizer subsidies promote cash production and a more land intensive production pattern while maize trade liberalization, on the other hand, stimulates food crops and land extensive production processes. In contrast, as the indicated that the fertilizer subsidy is not a key determinant of the use of fertilizer in paddy cultivation. The regression results from this study indicated that changes in the prices of fertilizer and paddy do not have a significant effect on fertilizer usage, which points to the fact that the fertilizer subsidy is not a key determinant of the use of fertilizer in paddy cultivation. The study also found that there is a relatively higher correlation between fertilizer usage and paddy price than between fertilizer usage and fertilizer price. These findings suggest that the fertilizer subsidy could be withdrawn gradually over time for future paddy farming in Malaysia. Thanks...

By,

M Anem,

Senior Agronomist,

Taman Bandar BAru UDA,
Johor Bahru,
Johor,
Malaysia.
(18 RabiulAwal 1439H)