Monday, April 25, 2011

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.


  1. Bravo comma and brilliant exclamation mark

  2. In my travels I have always noted that judging that cars,malls habits & houses Malaysia is indeed many steps ahead.
    But then I notice that in most countries it is not so easy to get credit.
    Is our economy driven by household debts?Have seen figures of 80% debt to GDP;which by itself is not pretty meaningful.But in reality I do know of many whose debt payments is in excess of 70% of their monthly incomes.
    In the old days (good or bad?) 30% for debt payments is about the most one can hope to be qualified for.
    This heatmap of household debt to GDP is interesting

    Is the heavy emphasis to get out of the middle income trap and henceforth to the Higher Income Economy nothing more than a desperate attempt to get out of a debt trap that can potentially cripple our banking system.
    But,making the wrong bets in the ETP will only exacerbate the already perilous situation.
    Your thots please

  3. Malaysians also have one of the highest per capita rates of car ownership in the world? Indeed all my 3 children own their own cars, that make 4 cars in a family of 5. The Aussie and Singaporeans are jealous of Malaysians!! However, each family member has to pay out RM400 per month to service their car loans, besides the initial RM10k as downpayment by the father. The children require cars because one work in Ampang, one work in Taman Tun and one work in Shah Alam, while we stay in OUG Jalan Klang Lama. There is no convienient transports, unless they have to wake up at 5.30am to catch the various buses to reach their office before 8.30am, or to reach home by 8-9pm every nite.

  4. @anon 11:18

    I got my first credit card when I was barely 18 - that was in the UK. Financial systems and business models differ, but getting personal credit in advanced economies isn't particularly hard. The heat map's interesting, thanks for the link. I notice that debt levels are higher for countries with higher per capita incomes and lower relative tax levels. Coincidence? Maybe not.

    Still household debt is a concern. To counterbalance that, most of Malaysian household debt appears to be used to finance investment (unfortunately mostly of the property variety). I think part of the problem and potential concern with debt here is that we have no idea of its distribution relative to wealth.

    @anon 11.55

    Sounds like my family :) During Hari Raya, there's barely enough space for all the cars, even if the garage area can fit 8.

    You've put your finger on it - despite high prices, Malaysians put up with it because there's no ready alternatives. The weather doesn't help either.

  5. When I studied Down Under, I love to watch news on social problems in Australia in shows like Today Tonight. One such problem is the dismal saving rates among Australian youths where despite savouring a minimum wage of AUS$13.50/hour even for lowly jobs such planting flowers for the city council and washing toilet bowls, many Australian youths barely have any savings are prone to debt.If I am not mistaken, most of ther youth they intrviewed barely have AUS$1000 in their account. Their high wages attracted greedy banks(I hate Australian Banks,they were like leeches) who sell them the promise of unlimited spending through credit cards which are in some cases, mailed straigh to youths as young as 15 and they can activate it by just an SMS.

    This burdens them later in life as they either do not bother to marry or face financial problems especialy in servicing home mortgages which takes a big chunk out of their spendings(they have high interest rates at 8%).It's common to hear pensioners in Australia having just enough money for the sake of living on and it would have been worse without their Social Security system called Centrelink which rolls out monthly sustenance income for low income earners(hence in Australia, every citizen gets some money when jobless as much as AUS400/week dependeing on certain circumstances!!).

    It is common that many homeless people in Australia are actually tradesmen with no education like plumbers, carpenters and construction workers who used to earn hundreds per day but an underclass who have a strange culture of binge drinking and indulging in decadent activities like prostitution which led them to their sad fate upon retirement.

    Perhaps this is what Hihsam pointed out, the higher GDP per capita, the higher the debt and possibly social problems if I may add.

    One observation I noticed and red here and there is that the reason why malaysians and generally Asians have high rate of ownership and even home ownership is that Malaysian/Asians tend to help family members. I mean they will chip in to help their siblings pay off home mortgages or the car for awhile during financial problems or parents help pay the down payment for the car for their recently graduated student and the fact most of us do not mind living in extended families in one home which conserve spending on food and electricity while the other houses(usually grandparents houses) are sold off or rented out as a form of investment.My grandmother's youngest sister who is unmarried lives in a relatively good nursing home because all of our cousins agreed to chip in at least RM50/month,really is not an issue for us and some of us are not that paid highly.This is why I came back to Malaysia.

  6. I agree about taxes. US is spiralling into debt because their silly government refuse to tax the rich.The same with Japan, they have a debt thrice their GDP but they have corporations like Toyota and Sony and other show are super them and Japan no longer need to plunder the savings of their own citizens in their Post office.

    Malaysian government should tax the grossly high income earners, the ones who evade taxes and then buy pimped up ahbeng mercedez..find a another way to tax them and circulate tye money into public projects.

  7. Hisham,

    If MI publishes an article that was written in your ‘language’, I doubt many would read and understand. I think you are right to say we don’t change much relatively compare to 20 years ago and that is the problem. Our capability to spend (purchasing power) remains same as a big chunk of income is channel into car and property. What was the impact some may ask, most Malaysian are relatively ignorant because we can’t afford to buy books and have less time to read, we don’t travel much as well. And therefore, MI can’t publish an economy piece by Hisham because nobody understand what you talking about. I am not kidding.

  8. @anon 10.18

    I think if you look at the vast majority of middle-income and high-income nations, you'll see the same story - high debt loads and insufficient retirement savings. We're really no exception.

    My thinking on the issue of taxation is really this: With higher marginal tax rates and capital gains taxes, traner payments are made possible from the better off sections of society to the worse off. But then you'll have to depend on the efficiency of the government to make it equitable, which is by no means a given.

    On your cultural observation, yes it's true, but in the West the absence of a family support group is compensated for by state support, whereas none of the East Asian states have a government funded social security system. For the most part I prefer our way, but that avoids the issue of fairness in taxation of income.

    @anon 10.45

    I prefer to give the money to the poor and lower income earners through automatic stabilisers (e.g.unemployment benefits, top-up compensation), rather than tempt the government with money to spend :)


    Actually, they've asked me a couple of times, but I wasn't too keen on the idea for personal reasons. But point taken. Sadly, the world and economics are getting more complex, and its hard to come up with simple solutions. The obvious answers aren't always the right ones, once you look past the surface.

  9. Hisham, don’t get me wrong. Your writing is excellent and would definitely apt to those that with solid economy background, and knowledgeable. However, I hope you could also write in a more layman language for people like me, and functioning as education for a broader reader. Paul Krugman writing style is pretty easy to grasp.


  10. You want me to write like a Nobel Laureate? LOL, not asking for much are you? :)

    I'm toying with the idea of doing another, more accessible blog, rather than change the character of this one. From the beginning, this blog was intended for a technical audience, and I don't really want to change that.

  11. Hisham, a good article and blog. I am surprised that I did not visit your blog earlier. Keep up the good work.

  12. I'm having econ exam next week, the Lect didn't teach us good. Lucky I found this blog. At least it give me some rough idea what is happening in Malaysian landscape