I can’t help but to laugh upon seeing the prime minister’s wish of ‘a Malaysia that would make a quantum leap from the current US$7,000 (RM23,100) per capita annual income to US$15,000 (RM49,500) in 10 years’. Now, I’m not looking down upon Malaysia’s ability to get itself into the US$15,000 per-person annual income league, nor belittling Najib Abdul Razak making this his important goal. What is dubious is, in fact, the level of US$15,000. Why that figure instead of some others?

Modern economy grows over a long period of time. In an agrarian economy, the farmer’s son is going to do just as well as his farmer father, and no more. Not so for the past 300 years; in the 20 ^th century alone, the world economy grew at a rate of, perhaps, 2% per year. Or maybe 1.5%. For the 2% case, the annual income grew seven-fold over the century; the 1.5% case, a still respectable 4.5 times. This is certainly not bad when you consider the fact that during the past century there were plenty of wars, genocides, nuclear explosions and natural disasters! Yet in the end, we see that there was a tremendous growth in income and more importantly, standard of living.

So I won’t look at the recent recession too pessimistically. The economy will grow. The Asian economy will grow. The European economy will grow. And of course, the US economy will grow. With economic growth, income will increase. Yet the PM is setting a static target.

You might say, well, perhaps our PM, being an ‘economist’ has already taken growth into account. He is projecting into the future using an appropriate growth rate. So why make so much noise?

Well, the PM uses a dollar figure. Have you heard of something called ‘inflation’? Inflation distorts the sense of income (and a lot of other things) because the currency, being a unit of measurement, loses value over time (the ruler gets shorter over time).

Income has value. ‘Price’ itself has not. When we refer to our income as being ‘RM2,000 a month’ we are just expressing the value of our income in terms of ‘ringgit’. You might as well say ‘700kg of rice per month’.

What can you say now? Inflation eats away my purchasing power; I spent more this year compared to the last, but my living standard is about the same’. But if I suggest to you that for the same amount of money you can buy a much more capable PC next year compared to this, you would probably say ‘yes’. It is also possible that something that is completely impossible today can be made next year, and you are going to buy it in huge quantities.

We can see at this point that the measurement of income is not a straightforward process. It is rather nasty. The terms ‘income’ and ‘inflation’ are actually abstract concepts. If you think this is rather confusing and difficult, you are not alone.

How do we measure income over time, then? Economists devised price indices (‘indices’ is the plural of ‘index’) to provide a better measure of purchasing power in terms of ringgit (or other currencies). An index can be as simple as expressing a series of numbers in terms of a starting year. So if I have a series (100, 200, 300, 400, 500), and I let 100 to be the base figure and ‘normalise’ it to 1, the corresponding index would be (1, 2, 3, 4, 5). There are also weighted indices. Think about measuring a hundred goods that you buy regularly (‘a basket of goods’) and measure the changes in their prices over a period of time, taking into account their relative importance to your budget.

This might sound very confusing, but the idea is simple. You see indices in action on a day-to- day basis - for example, the consumer price index (CPI, a measure of inflation), the Kuala Lumpur Composite Index (KLCI), the S&P 500 and the Human Development Index. They provide a meaningful measure of a subject in question.

So we have covered the issue of growth and measurement in some detail; let’s get to the PM’s point. He hopes for a per-capita income level of US$15,000. Now, what is the current per-capita national income for the US? Roughly US$40,000 in 2009. We will use 2009 as a base CPI throughout our discussion, so this corresponds to ‘real income’ with adjustment to the general price level as in 2009. This is very crude and imperfect, because the component used in calculating the CPI actually changes over time. But this is better than no yardstick at all.

US$40,000 is nearly six times Malaysia’s per-capita income. It was quite a while ago that the US per-capita income was US$7,000 and even US$15,000. Consider the real (adjusted) US per-capita national income figures for these years: 2009 - $40,026; 2001 - $39,030; 199 -, $32,595 [...] 1961 - $19,167; 1951 - $16,186; 1941 - $12,669 (you can calculate these using data from the US Census Bureau, the Bureau of Economic Analysis and the Bureau of Labor Statistics.) US$15,000 was for between 1941 and 1951.

I have no idea when the US per-capita national income was exactly US$15,000 but we do know that the corresponding figure in 1951 was US$16,000 and that was surely a long while ago.

The Americans have since gone far. Information about their standard of living today is widely available. And the gap between the standard of living of Malaysia and the US (and pretty much of the other developed nations) is wide today. The world economy is going to grow for the next ten years, and the developed economies are surely not going to be left out. By then, what would be the US per-capita national income? US$45,000, US$60,000 or US$80,000?

By now, we would like to ask, what’s is our PM’s sense of US$15,000? Real terms or nominal terms? What would the rates of inflation and technological progress be? Only he or his advisers could answer those questions. Instead, I would conclude by showing you a few propositions of differing enormity.

The first is the growth rate we need to have in order to attain a per-capita national income of US$15,000 starting from 2008 till 2020, in nominal terms and today’s ringgit. We assume that the ringgit-US dollar exchange rate is going to be constant all the way till 2020. The per-capita Gross National Income of Malaysia in 2008 is US$6,970. By doing some math, you will get a required growth rate of 6.6% per annum.

However, if we were to attain a per-capita national income of US$40,000, other things being the same, the Malaysian per-capita national income would have to grow at 15.7% per annum. This is even better than the Four Asian Tigers’ during their heyday of 1970s and 1980s.

Now the more sobering one. If the US per-capita national income does grow at 2.5% all the way to 2020, the figure would be US$52,500 at 2020. If we do play catch-up, our per-capita national income would have to grow at 18.3% per annum.

The US$6,970 figure I used earlier is the nominal figure. This is pretty close to the PM’s suggestion of US$7,000. The Purchasing Power Parity (PPP) figure (see the Big Mac Index for an idea) is about US$14,000. Well, where is there to grow if the figure is already at US$14,000? US$1,000 surely is plenty of room and for a good ten years.

What is the point of the idea that our PM is selling? There is growth, but apparently the end product is far behind the standards of developed economies; ambiguous wording that sounds grand and inspiring, but will be disappointing upon close examination.

And I suspect his vision would get even more unpalatable when equity of income and other issues of development are taken into account. Apparently, there is more work to be done.