AUGUST 17 — In the first part of this article the authors argued the reasons behind the apparent increase in cost of living in Malaysia.

This article will continue its deep dive into the issue beyond the usual narrative of wage growth stagnation and the rise of prices of goods and services.  Cost of living is not entirely a domestic phenomenon.

It is in fact a universal one by which economies suffer from the gap between policy adoption and economic reality. Given the complexity of the forces that either cause or magnify the problems, the authors argue that policy options must be viewed holistically in three areas; One, factors affecting the prices;

Two, factors leading to spending patterns of Malaysians; And three, the value of ringgit.  Firstly, the Consumer Price Index (CPI) is the official indicator to measure cost of living in Malaysia. The Producer Price Index (PPI), however, falls outside the scope of inflation although its increase will also affect prices of goods and services. So in theory, any movement of the CPI will affect cost of living. But in reality, the CPI is an ineffective yardstick of headline inflation due to its structural weaknesses.

It is evident that a number of critical factors affecting urban dwellers are negligible in the eyes of the CPI. Factors such as toll fares, railway costs (i.e. the LRT, and in the future, MRT) and maintenance fees of high-rise buildings account for merely 0.1 per cent of the total CPI weight. These factors represent a significant share of income of an urbanite in Klang Valley.

This will eventually lead to two unintended consequences. One, incorrect measurement of inflation will lead to incorrect policy options on everything related to inflation, such as property prices, taxation and interest rates. And two, as long as CPI understates the rise in cost of living, workers are forced to take the hit even more as many companies would usually base their wages to the movement of the CPI. In other words, if the CPI stays low, there is no incentive for the companies to raise compensation as wages cannot increase without inflation.

Hence the authors suggest collective bargaining of workers should be empowered to determine the true value of their contribution and demand fairer wages. Under the Trans-Pacific Partnership (TPP), collective bargaining will bring our labour market at par with global standards and it should be a matter of time before it becomes a reality.  To address the supply-side of rising prices, the government needs to prioritise its actions in two aspects.

Firstly, the price translation mechanism from the global market to the local one has to be at the minimum level. It therefore requires, among other efforts, bringing tariffs to zero per cent.  Presently, Malaysia is importing more than 99 per cent of goods at zero tariffs from Asean countries. The same percentage of tariff lines from Australia will be eliminated by 2020.  Perhaps it is imperative for the government to speed up tariff elimination from other import sources as well.

Secondly, analogous to the relaxation of ride-hailing services with Uber and GrabCar, the government needs to increase the number of suppliers in the market, particularly in areas where market inefficiencies and monopolies exist. This is relevant in the services sector where protectionism in permits and licences still prevails.  The second policy option will need a closer look into consumer’s spending patterns. This is closely linked to the standard of living in Malaysia.

The government still possesses some controls over its citizens’ standard of living, such as loans for education, housing, automobiles, access to finance and technology costs, which in turn reveals a lot about the quality of life in Malaysia. Having said that, the government does not have control over financial literacy of its citizens. Rebutting the common assumption that people behave in rational ways, people are in fact, very irrational. We respond to various incentives in making our decisions.

The government, of course, cannot dictate people to behave rationally. Instead, it can shape incentives for people to be financially disciplined by not making the unaffordable, affordable.  Today, our household debt-to-gross domestic product (GDP) ratio breaching 90 per cent, among the highest in Asia.

On the one hand, car ownership beyond accounting book value creates an impression that cars are more affordable than they seem. Yet, it merely crafts a fictitious extension as cars would have become obsolete by the end of fifth accounting year. In fact, the cost of car ownership should be made much higher beyond the book value if it is not already at unaffordable levels. On the other hand, it is in the interest of financial institutions to increase loan growth by extending more credit facilities and encourage greater consumer spending. 

The good news is the Credit Counselling and Debt Management Agency (AKPK), set by Bank Negara Malaysia, is doing a great job in ensuring that people will have some form of financial literacy and this can be promoted even further.  The final policy option lies in the value of ringgit to reflect the value of imports and the purchasing power of Malaysians abroad.

Ideally, Malaysians would want to see that they have a better purchasing power abroad which has a lot to do with a strong value of ringgit.  Though, there is little we can do with regard to the value of our currency.  Ringgit is following a basket of currencies where the US Dollars (USD) is assumed to have the most significant share of the currency basket. As long as price of oil is determined in USD and oil is Malaysian largest export component, the value of ringgit, thus, is heavily influenced by global movement in oil prices.

To sum up, our policies must reflect the reality so that the Rakyat will respond to them. Let us go back to basics and things will fall into places eventually.

This article first appeared in Malay Mail, 17 August 2016.

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