Inflation And The Cost Of Living

I was asked by reader Faisal Nazrin Zainuddin to comment on this article in the Malaysian Insider:

Malaysians plagued by poor purchasing power

Analysts say the undervalued ringgit distorts the country’s purchasing power for imported goods. — Reuters file pic

KUALA LUMPUR, April 19 — Malaysians who find themselves affording less than their contemporaries overseas have distorted and inefficient markets, lack of competition, low wages and a weak ringgit to thank for their poor purchasing power, which in the case of KL, is only 34 per cent that of New York. Despite government assurances stating that inflation is under control, Malaysians are becoming increasingly restive over the cost of goods in relation to wages, especially those who are able to compare the corresponding price-to-wage ratios in developed economies.

Malaysians who have experienced working and living abroad often experience sticker shock when they come back and see prices in KL.

This is actually one of a trio of articles on the same subject (find the others here and here).

Frankly I have little patience for analysis like this – as they say, torture the data long enough and you can get it to say anything. In this case, my particular problem is this: you’re talking about two distinct if related things, where causality is unproven and problematical. To be precise, the articles conflate the cost of living where you’re talking about the price level relative to incomes, with inflation, which is the rate of change in the price level. The former is a relative measure between two variables while the latter measures the change in only one of those variables.

I don’t question that the cost of living in Malaysia is high relative to incomes, but you have to ask if this is a recent phenomena ( in which case inflation would play a role), or one inherent to the Malaysian experience. And I distinctly remember from my own undergraduate days and early working life lo these twenty years past, that the same comparison continued to hold – Malaysia isn’t a cheap place to live if you’re earning in Ringgit, even back then.

In which case, the inflation argument is a straw man for the real problem – the lack of income growth relative to productivity and inflation, which the articles barely bothered to address.

Nor will Malaysia reaching high income status necessarily solve the problem: I noted with some amusement that Singapore ranks even lower than Malaysia in affordability. Which incidentally means that following the prescriptions identified by the analysts in the articles (reduce market anomalies and monopolies) probably won’t make much of a difference.

Digression: the comparisons over the price of the iPhone are laughable to anyone who knows the global telecommunications industry.

Second digression: cars are expensive in Malaysia, no question. But that’s counterbalanced by the fact that Malaysians also have one of the highest per capita rates of car ownership in the world. Strange but true.

So there’s something else going on here that needs addressing, if we’re to reach the same level of affordability as advanced economies.

At heart, we’re talking about two separate issues: notwithstanding what I said just now, raising incomes generally over and above the rate of inflation will be a precondition of raising real living standards. On that basis we’re making some progress – the NEM’s strategy of boosting investment and incomes in the services sector should pay dividends down the road, as it isolates the domestic labour market from external arbitrage and should force wages up. But Singapore’s ranking suggests that this is only just the first step.

The second issue is reducing income inequality to somewhere approximating advanced economy levels. I’m not advocating here absolute equality: that’s a nonstarter and not strictly necessary. Even when we’re talking about relative income inequality, what we’re really reaching for is a level of income inequality where the lowest sections of society are able to afford a decent standard of living. Hafiz Noor Shams has a good blog post examining the debate over inequality, and jamessz has a nice analysis of the impact of price increases on different levels of society (see pgs 10-14).

But that means reversing some of the things the economic orthodoxy would have us do, and would probably be very unpopular with a large section of society – more labour protection, not less; more labour union representation, not less; more taxation, not less. And for the latter, what I mean is not just reintroducing and increasing real property gains taxes, but boosting taxation on any type of capital income – property, shares and business income. What we’re talking about here is really the redressing the relative strength of bargaining power, and income and wealth generation between capital and labour.

Will this reduce investment? Oh my yes. But it would also create more of a level playing field for all citizens. It doesn’t make sense to me that wages and salaries are taxed, but capital income isn’t. That means owners of capital, who already own most of the wealth, get a free ride while salaried workers, who own considerable less, get taxed. It doesn’t make sense to me that corporate chieftains and other shareholders get full benefit of any profit from the paper shuffling of their businesses, while anyone earning more than the median wage gets a quarter of their income sequestered by the government. That’s just a recipe for the haves continuing to gain more, while the have-nots struggling to secure their financial futures. From the point of view of the individual, income is income, not matter what it’s source, and should be taxed the same.