Finding right balance for overall growth
MALAYSIA has a lot to celebrate after six decades of independence. We are definitely better off compared with where we started.
Most indicators like income, health, and education are approaching the levels of a developed nation. In fact, some indicators are as good as those of some developed nations.
This implies that resources have been successfully allocated in the economy. In this context, the poverty rate is one important indicator. If resources are efficiently allocated in the economy, income level should increase and the incidence of poverty should be eradicated, or at least minimised.
We have come a long way since the inception of Malaysia. Gross domestic product (GDP) per capita, in nominal terms, improved to RM38,853 in 2016, from a meagre RM861 in 1963.
Meanwhile, the poverty rate was 0.4 per cent in 2016 compared with 49.3 per cent as late as 1970, more than a decade after independence. This implies that the country’s rich resources are efficiently allocated, hence people are better off over time.
So can we pat ourselves on the shoulder to celebrate our success? Not quite, at least not until we answer the mind-boggling question on the issue of high cost of living faced by some Malaysians today.
There seems to be a paradox between high cost of living and low incidence of poverty. We would expect that high cost of living should not be an issue within the environment of lower incidence of poverty.
If we are doing the right things and all the indicators are true, why has such a paradox emerged?
Rather than focusing on answering the “why” issue, which is very subjective and normative in nature, let’s focus on the “how”.
The inconsistency itself is purely a measurement issue. What is more important is that people are better off, either by eliminating the high cost of living or the high cost of living doesn’t bother them.
In the first place, the “high” cost of living is a relative measure. What is high to someone is not necessarily high for others. The two variables that directly constitute the issue are income and price. What is expensive for the poor is not necessarily so for the rich. Higher prices within the high-income society is not as bad as higher prices within the lower income group.
Therefore, the primary solution for addressing high cost of living is by increasing the income level of the people. This can be done by productivity improvement, which in turn can only be achieved in the long run. It cannot happen overnight.
The remaining short-run option to address high cost of living issue is through prices. Many perceive that controlling headline inflation is the solution. This is not necessarily the case.
Headline inflation, normally measured by the change in consumer price index (CPI), only looks at the year-on-year change in the price level.
This change in price level is not really significant for most people unless there is hyperinflation, and we haven’t seen hyperinflation in Malaysia for a long time. Interestingly, inflation rates in Malaysia are relatively lower during periods associated with high cost of living. Therefore, it makes no sense to associate inflation with high cost of living.
What is more important is when the price levels of many goods and services are relatively high for many Malaysians. Compared with a decade ago, prices of many goods and services have increased manyfold, while household incomes increased only by twofold.
The median monthly household income was RM2,552 in 2007 and increased to RM5,228 in 2016. This has made people poorer. For that matter, lower inflation on the already high price level has a negligible impact on people in the lower-income bracket.
Prices of many goods and services are beyond our control. They are determined in the world market within an environment of an open economy. Thanks to free trade, we even have to pay higher prices for goods that we have abundantly.
Nevertheless, keep in mind that the overall benefit of free trade in terms of income gain ought to be better than higher prices of goods and services that we have to pay. Otherwise, there is no reason for us to trade.
The scenario suggests that focusing on prices to solve the high cost of living issue is not a total or partial solution. At best, it can be a temporary solution. It doesn’t attack the root of the problem. Rather, it touches only the tail end of the issue.
The primary solution for addressing high cost of living is by increasing the income level of the people. This can be done by productivity improvement, which in turn can only be achieved in the long run. It cannot happen overnight.