Tuesday, October 26, 2010

Tun Dr Mahathir Points Out The Elephant In The Room

So much for staying away from blogging.

It was a little over a year ago that I wrote a post on what the Malaysian economy would look like in the run up to becoming a high income economy.

Now our ex-PM points out the same problem that I worried about:


…For the private sector the money can come from more efficient management, higher productivity through more efficient output by workers or through investments in better machinery and equipment. Almost invariably the higher wages and salaries will increase cost and therefore the prices of goods and services.

Higher income will therefore result in higher cost of living. This will reduce the purchasing power expected of higher incomes. This would be meaningless unless the increase in cost of living will be less than the increase in incomes.

Unless the increase in incomes is properly managed, it will not enrich the people in terms of purchasing power. As the cost of living rises, the increases in income may not purchase more than what the previous lower income would. Indeed it may be possible that the increases in income will actually purchase less goods and services than the previous low income…

Funny – reading my post again after a year on, it remains as relevant today as when I wrote it.


  1. Bingo bruder, that celup is 1 year behind your thoughts.

  2. For a non economist or layman "it's elementary my dear Watson". Our system does follow economics theory but but greed which does not show any limit to it. May Allah protect us all.

  3. Then, what say you on the current scenario... increasing price but stagnating income. Starting salary for a graduate in 1995 was RM1500. Starting salary for a graduate in 2010 is RM1500. How about that?

  4. You forgot to mention the 20%+ unemployment rate for graduates.

    But you're right, income growth is an issue as well. In fact, that's why I stressed services as the key battleground for becoming a high income economy.

    The problem with an export-led economy is that wages in the tradeable sector are directly exposed to overseas competition - if you're engaged in low wage export industries, low wages is exactly what you get. Worse, wage and productivity increases put downward pressure on the exchange rate. The effect is greater as the size of the export sector gets bigger.

    The obvious policy prescription is obviously to direct resources towards growing the non-tradeable sector. Hence my post last year.

    But that won't solve everything either, as I think I noted.

  5. yup. services sector is the way forward for Malaysia. especially in financial and consulting area.

    lets give up low-wages tradeable sector to Vietnam and China. dont have to waste so much resources to compete with these two. or else we ll be going nowhere.

    lets think and act like developed country. social safety net needs to be strengthen. subsidy needs to be rationalize to make it more targeted to vulnerable ppl only. free the market from too much government intervention except in strategic sector (i do believe PETRONAS has to be in the hand of public since its managing resources belonging to all Malaysians). dont have to pursue something (e.g. pride for having PROTON) which carries no reasons for existance. too much money wasted for this sake of "pride".

  6. Cost of living will defintely rise regardless fo the growth and the improvement of standard of living depends on the ability of the production capacity to increase in its productivity,especially in the long run. And we know a higher savings rate provides greater avenue for bigger capital formation and hence better equipped production capacity / skill set. This will move the productivity in middel to long run. To achieve this ample savings rate without hurting the level of spending in the economy, a nation needs higher GDP and a high income household will definitely contribute to this. So yes, I think high income may indeed improve the cost of living.

  7. @anon 11.17

    That's a good analysis, one I would generally agree with. But there are a couple of problems in the present context.

    First, nothing says that labour must be paid its marginal product. That's just a simplifying assumption used in economic models, not something that happens necessarily in reality. Empirically over the past couple of decades, wages paid to workers have not kept pace with productivity and inflation - increases in returns to output have instead gone to owners of capital.

    Second, we already have an outsized national savings rate, which hasn't translated into higher investment over the past decade. I happen to think (and the anecdotal evidence tends to support this hypothesis), that overinvestment in the 1990s and the emergence of China has contributed to a glut in productive capacity in certain industries. It doesn't help that because of the first factor I mentioned above, most of this saving is corporate and not household.

    It follows therefore that raising GNI without paying attention to distributional and inequality problems aren't going to have the desired effect of raising the quality of living generally, rather than for just owners of capital. So while I firmly believe that we will actually hit the GNI target early, I'm not so confident that it will be as beneficial a its made out to be.

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