An evaluation of government assistance to the Malaysian flue-cured virginia tobacco industry

Abstract

The Government of Malaysia has been encouraging the modernization of the Malaysian Flue-cured Virginia (MFCV) tobacco industry, with the objective of increasing farmers' incomes and levels of living. Part of the encouragement has been in the form of regulating minimum prices and the grading structure, providing extension services and input subsidies, imposing import duties on tobacco and cigarettes, and implementing projects with advanced technologies for tobacco production. Some groups claim that the industry is receiving too much governmental assistance. Therefore, the purpose of this study is to measure the extent of the assistance. In particularly, it measured the assistance given to the tobacco growing and curing activities, both individually and jointly, for 1980 and 1984. The measurement of assistance is based on the theory of the effective rate of protection. A number of standard measures, including the Nominal Rate of Assistance, Gross Subsidy Equivalent, Effective Rate of Assistance and Net Subsidy Equivalent are employed in measuring the assistance. The methods used to derive these measures are those employed by the Australian Industries Assistance Commission which in turn are derived from the work of Balassa. The study found that, if it is assumed that all assistance flows to growers, in 1980 the growing activity received very high assistance: the estimated effective rate of assistance was 1,232 per cent. The effective rate of assistance for 1984 was not calculated due to the negative value-added, implying even higher assistance. Under this assumption, the estimated effective rates of assistance for the curing activity were -12.44 and -3.6 per cent for 1980 and 1984 respectively, implying the activity was taxed by the community. With the assumption that the assistance was fully retained by curers, the assistance given to the growing activity in 1980 and 1984 was low with the estimated effective rates of assistance being 22.06 and 14.92 per cent respectively. The effective rates of assistance for the curing activity in these years were not calculated due to the negative value-added, implying very high assistance. The study found that the assistance given to the joint activity of tobacco growing and curing for 1980 and 1984 was high: the estimated effective rates of assistance were 107.34 and 169.64 respectively. It is concluded that, probably, the estimated assistance of the joint activity is most indicative of assistance received by growers and curers in these years. Comparisons with other studies suggest that the rates of assistance given to the joint activity of tobacco growing and curing in 1980 and 1984 were generally far higher than that for other agricultural activities in 1973, in particularly for smallholder rubber, oil palm, coconut, livestock, food crops and total primary industry. The rates were also far higher than that for several agricultural activities in 1977, in particularly smallholder rubber, oil palm, cocoa, cocoa-coconut (intercropping) and rice. Show more