The Assessment of Direct Agricultural Investment and Cash Transfer on Households in Malaysia: An Evidence of Compensation Mechanisms for Fuel Subsidy Removal

  • Sze-Ying Loo Universiti Utara Malaysia
  • Mukaramah Harun Universiti Utara Malaysia
Keywords: Fuel subsidy removal, Compensation mechanism, Saving reallocation on agricultural investment, Saving reallocation on direct cash transfer, Computable general equilibrium (CGE) model


The objective of this study was to examine the impacts of introducing compensation mechanisms of direct agricultural investment and cash transfer for fuel subsidy removal, with particular focus on the income and consumption of all household segments in Malaysia. A computable general equilibrium (CGE) model was built on the basics of the standardized LöfgrenCGE model to conduct this study. The subsidy removal, without integrating any compensation mechanism, imposed additional burdens of living cost on households as fuel was one of the important elements of the consumption basket especially during the period of transition, thus indicating a need for this study. The ultimate results revealed that the introduction of direct cash transfer was more desirable for both the low-and the medium-income segments to live with high prices where their existing consumption level would be maintained. Comparatively, the direct agricultural investment by increasing the use of intermediate inputs in the production did not seem to be enough to help the rural low-income segment within the period, mainly because of reducing the factor income (factor reallocation effect), and exaggerating consumption expenditure subsequently. Thus, direct cash transfer was considered a direct and faster way to help the needy in the short term. However, the direct agricultural investment remained the best approach to gain long-lasting impacts; not only in helping the rural poor, who mostly dealt in agricultural activities, but also in motivating overall economic activities


Akinyemi, O., Alege, P. O., Ajayi, O. O., Adediran, O. S., & Urhie, E. (2017). A simulation of the removal of fuel subsidy and the performance of the agricultural sector in Nigeria using a dynamic Computable General Equilibrium Approach. Covenant Journal of Business and Social Sciences, 8(1), 60-70.

Anand, R., Coady, D., Mohammad, A., Thakoor, V., & Walsh, J. P. (2013). The fiscal and welfare impacts of reforming fuel subsidies in India (IMF Working Paper No. WP/13/128).

Washington, DC: International Monetary Fund. Retrieved from

Arze del Granado, J., Coady, D., & Gillingham, R. (2010). The unequal benefits of fuel subsidies: A review of evidence for developing countries (IMF Working Paper No.WP/10/202). Washington, DC: International Monetary Fund.

Bekhet, H. A. (2010). Ranking sectors changes of the Malaysian economy: Input-output approach. International Business Research, 3(1), 134-143.

Bekhet, H. A., & Yusop, N. Y. M. (2009). Assessing the relationship between oil prices, energy consumption and macroeconomic performance in Malaysia: Co-integration and vector error correction model (VECM) approach. International Business Research, 2(3), 152-175.

Cervantes-Godoy, D. & Dewbre, J. (2010). Economic importance of agriculture for poverty reduction (OECD Food, Agriculture and Fisheries Working Papers, No. 23). Paris, France: Organisation for Economic Co-operation and Development.

Coady, D., Flamini, V., & Sears, L. (2015). The unequal benefits of fuel subsidies revisited: Evidence for developing countries (IMF Working Paper No. WP/15/250). Washington, DC: International Monetary Fund.

Coady, D., Parry, I., Sears, L., & Shang, B. (2015). How large are global energy subsidies (IMF Working Paper No. WP/15/105)? Washington, DC: International Monetary Fund. Retrieved from

Cockburn, J., Robichaud, V., & Tiberti, L. (2018). Energy subsidy reform and poverty in Arab countries: A comparative CGE-microsimulation analysis of Egypt and Jordan. Review of Income and Wealth, 64(1), 1-31.

Cooke, E. F. A., Hague, S., Tiberti, L., Cockburn, J., & Lahga, A. R. E. (2016). Estimating the impact on poverty of Ghana’s fuel subsidy reform and a mitigating response. Journal of Development Effectiveness, 8(1), 105-128.

Dabla-Norris, E., Kochhar, K., Suphaphiphat, N., Ricka, F., & Tsounta, E. (2015). Causes and consequences of income inequality: A global perspective (IMF Staff Discussion Note No. 15/13). Washington, DC: International Monetary Fund. Retrieved from

Hakim, R. A., Ismail, R., & Razak, N. A. A. (2014). Fuel subsidy rationalization: The perils of the middle class in Malaysia. Jurnal Ekonomi Malaysia, 48(2), 83-97.

Hamid, K. A., & Rashid, Z. A. (2012). Economic impacts of subsidy rationalization Malaysia. In Wu, Y., X. Shi, and F. Kimura (Eds.), Energy market integration in East Asia: Theories, electricity sector and subsidies (ERIA Research Project Report 2011-17). Jakarta: Economic Research Institute for ASEAN and East Asia. Retrieved from

Harun, M., Mat, S. H. C., Fadzim, W. R., Khan, S. J. M., & Noor, M. S. Z. (2018). The effects of fuel subsidy removal on input costs of productions: Leontief input-output price model. International Journal of Supply Chain Management, 7(5), 529-534.

Harun, M., Sallahuddin, H, & Che Mat, S. H. (2018). Pursuing more sustainable energy consumption by analyzing sectoral direct and indirect energy use in Malaysia: An inputoutput analysis. International Journal of Economics and Management, 12(2), 501-210.

Harun, M., Zakariah, A. R., & Azali, M. (2012). Constructing a social accounting matrix framework to analyse the impact of public expenditure on income distribution in Malaysia. Jurnal Ekonomi Malaysia, 46(2), 63-83.

Hassan, A. A. G., Saari, M. Y., Utit, C., Hassan, A., & Harun, M. (2016). Penganggaran impak pelaksanaan CBP ke atas kos pengeluaran dan kos sara hidup di Malaysia. Jurnal Ekonomi Malaysia, 50(2), 15-30. doi: 10.17576/JEM-2016-5002-02

Hena, S., Luan, J. D., Rehman, A., & Zhang, O. X. (2019). A comparative analysis of agricultural development and modernization between China and Pakistan. International Journal of Advanced and Applied Sciences, 6(4), 81-94.

Holland, D., Figueroa, E., & Gilbert, J. (2001). The role of agriculture and food processing in the Chilean economy: Results from an input-output analysis. Estudios de Economia, 28(2), 293-308.

Khazanah Research Institute (2018). The state of households 2018: Different realities (3rd ed.). Kuala Lumpur: Author.

Laderchi, C. R. (2014). Transitional policies to assist the poor while phasing out inefficient fossil fuel subsidies that encourage wasteful consumption. Washington, DC: World Bank.

Lofgren, H., Lee, R. H., & Robinson, S. (2002). A standard computable general equilibrium (CGE) model in GAMS. Washington, DC: International Food Policy Research Institute.

Loo, S. Y. & Harun, M. (2019). Fuel subsidy abolition and performance of the sectors in Malaysia: A computable general equilibrium approach. Malaysia Journal of Economic Studies, 56(2), 303-326.

Malaysia, Department of Statistics (2016). Report of Household Income and Basic Amenties Survey 2016. Retrieved from

Nejadrezaei, N. & Ben-Othmen, M. A. (2019). Rural development as a key to achieve zero hunger in 2030. In Filho, W.L., Azul, A.M., Brandli, L., Ӧzuyar, P.G., & wall (Eds.), Zero Hunger. Cham: Springer.

Rehman, A., Luan, J. D., Khatoon, R., Iqbal, M. S., & Hussain, I. (2016). Effect of agricultural growth on poverty reduction, its importance, suggestions. Transylvanian Review, XXIV(5), 449-454.

Rentschler, J. & Bazilian, M. (2017). Principles for designing effective fossil fuel subsidy reforms. Review of Environmental Economics and Policy, 11(1), 138-155.

Rentschler, J. (2016). Incidence and impact: The regional variation of poverty effects due to fossil fuel subsidy reform. Energy Policy, 96, 491-503.

Samanta, S. K. & Cerf, J. G. (2009). Income distribution and the effectiveness of fiscal policy: Evidence from some transitional economies. East-West Journal of Economics and Business, XII(1), 29-45.

Sayed, L. E., Sayegh, W., Saliba, E., & Stephen, J. (2015). Fossil fuel subsidies in Lebanon: Fiscal, equity, economic and environmental impacts. Lebanon: United Nations Development Programme. Retrieved from

Siddiq, K., Aguiar, A., Grethe, H., Minor, P., & Walmsley, T. (2014). Impacts of removing fuel import subsidies in Nigeria on poverty. Energy Policy, 69(C), 165-178.

Solaymani, S., Kardooni, R., Kari, F., & Yusoff, S. (2014). Economic and environmental impacts of energy subsidy reform and oil price shock on the Malaysian transport sector. Trade Behaviour and Society, 2(2).

Solaymani, S., Kari, F., & Zakaria, R. H. (2013). Evaluating the role of subsidy reform in addressing poverty levels in Malaysia: A CGE poverty framework. The Journal of Development Studies, 50(4), 556-569. doi: 10.1080/00220388.2013.841888

Thiessen, C. (2015). Money in the pocket, food on the table: The economic case for investing in agricultural development. Canadian: Canadian Foodgrains Bank.

Widodo, T., Sahadewo, G. A., Setiastuti, S. U., & Chaerriyah, M. (2012). Energy market integration in East Asia: Theories, electricity sector and subsidies. In Wu, Y., Shi, X., &

Kimura, F. (Eds), Cambodia’s electricity sector in the context of regional electricity market integration (ERIA Research Project Report 2011-17). Jakarta: Economic Research Institute for ASEAN and East Asia. World Bank (2019). Agriculture and food. Retrieved from

Yahoo, M., Zulkeffeli, Z., Rashid, Z. A., & Puasa, A. F. (2017). A CGE model for assessing the economy-wide effects of removing the cooking oil subsidy in Malaysia. International

Journal of Economics, Management and Accounting, 25(3), 491-511. Retrieved from

How to Cite
Sze-Ying Loo, & Mukaramah Harun. (2020). The Assessment of Direct Agricultural Investment and Cash Transfer on Households in Malaysia: An Evidence of Compensation Mechanisms for Fuel Subsidy Removal. International Journal of Business and Society, 21(1), 300-312.