| Summary: | Energy subsidy policy is one of the most favorable policies implemented by many oil
producer countries in improving their economic development. However, the economic
outcome is still debatable due to the implications on economic efficiency, fiscal policy and et
cetera. As two main oil producer countries in ASEAN 5, both Malaysia and Indonesia had
allocated 5% of energy subsidy (% of GDP) averagely throughout the period of 1990-2014.
This paper is intended to study the impact of energy subsidy on economic production in
Malaysia and Indonesia by employing a dynamic panel data analysis. Our finding suggests
that the energy subsidy affects the growth output positively in the long run. We conclude that
energy subsidy is significant to promote economic growth in both countries. The absence of
energy subsidy will bring harm to the economic growth. However, if a reduction of energy
subsidy is essential to improve efficiency and fiscal pressure, we suggest the policymaker to
implement some offsetting policies to cushion the economy from any shocks.
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