Malaysiakini Opinion

The crux of inflation and stagflation in Malaysia

Phar Kim Beng  |  Published:  |  Modified:

COMMENT | Without being empirically petty, the income of the average Malaysian has remained stagnant at least since 1997, the year the Asian financial crisis hit. Some may aver that the incomes of many households are in fact regressing.

The Employees Provident Fund (EPF) noted in 2017 that close to 92 percent of Malaysians were earning less than RM6,000 a month. This is a far cry from what Vision 2020 had set out in 1990, when Dr Mahathir Mohamad set out the mission to grow the GDP by 7.5 percent each year.

But since Mahathir’s retirement in 2003, and before his recent comeback, Malaysia has not truly forged ahead. Little wonder that the gross national income in 2017 only grew by 0.1 percent.

Indeed, not unless a husband, a wife, or, their children are out working, there is no way a whole family could have thrived from 1997 to 2017. Not surprisingly, the property markets have crashed too, as the prices of houses and apartments have outstripped the abilities of many to even get a 25-year loan.

Thus, in spite of the availability of many houses and apartments in the market, the progressive reduction of any disposal income has led to a deflation of the property sector.

Rising inflation

However, inflation is also happening at a time when demand for foreign goods remains brisk. When the clamour for foreign goods, especially iPhones and other imported gadgets remains relentless, Malaysians are bound to feel the bite of inflation, given the persistent weakness of the ringgit.

This is because Malaysian consumers would have to pay more for everything bought from abroad, or consumed abroad when one is travelling. Such an increase in the cost of living can be classified as imported inflation. In other words, the cost of living increases, when Malaysians buy anything imported from abroad, or go abroad.

Thus, even when twinning degrees are introduced in Malaysia, the cost of a degree from Monash University or Curtin University pursued locally would still be more expensive than a local degree.

Nevertheless, the more Malaysians see these products as a ‘need’ and not a ‘want,’ the prices of goods and services will continue to rise.

The solutions to inflation are both complex and varied. A mere repeal of the goods and services tax (GST) isn't enough. All the ministries in the Malaysian government have to work together to bring the cost of living down.

For example, if the Education Ministry cannot temper the fetish of most parents to send their children abroad, the higher tuition fees will eat into their savings.

If the Defence Ministry does not know how to eradicate internal corruption, other unintended consequences may appear, leading to the reduction in the government’s fiscal spending room.

In turn, if the Foreign Ministry is clueless on how to reduce its annual RM780 million ringgit budget, then Putrajaya would have less to spend on other items to assist the domestic welfare of the people.

Countering stagflation

Notwithstanding this inter-ministerial effort, any attempt to tame inflation – no matter how imperfect – can be broadly divided into two categories.

If one follows the tenets of John Maynard Keynes, the British economist who revolutionised economic thought in ending the Great Depression of the 1920s, the role of the government is critical. The government of the day can pump or prime its economic spending in order to increase aggregate demand.

If, however, one believes that the supply of money is more important in controlling inflation, then it helps to raise the overnight lending rates of the central bank, so that not all banks and consumers can borrow freely. The frenetic animal spirit of inflation would then be contained.

At RM1.09 trillion, the national debt of Malaysia is nearly 80 percent of the GDP. In other words, there isn't much room for Mahathir (photo) to go on a spending binge to get the country out of stagflation or the middle-income trap.

Nor can Malaysia lower the base lending rate, which is maintained at 3.25 percent at present, to allow the banks to borrow freely – a practice that would increase the supply of money in the market.

Mahathir's second trip to Japan, however, is his first salvo to get the Malaysian economy up and going.

By reducing the national debt through cheaper yen-denominated soft loans – or a strategic infrastructure investment fund, the likes of which can be offered by Japan Bank of International Cooperation or the Japan Overseas Infrastructure Investment Corporation for Transport and Urban Development – Malaysia can create a vital economic window to reflate the economy again.

The effort, while strenuous, is worth a try. In spite of China's One Belt One Road initiative, research has shown that Japan is still US$75 billion ahead in Asean. If the US and China are caught in a trade war, Malaysia offers the room to allow Chinese factories and manufacturers to relocate their operations to Selangor, Penang and even Sabah and Sarawak.

Having said that, political economist Woo Wing Thye is right to point out that if the trade war drags on indefinitely, the global economic pie will shrink, leading to less interest in investing anywhere, let alone Malaysia.

Thus, it is vital that Malaysia urges China, the US and Japan to embrace free trade, not a trade or tariff war.

PHAR KIM BENG is a Harvard/Cambridge Commonwealth Fellow, a former Monbusho scholar at the University of Tokyo and visiting scholar at Waseda University.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.

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