Monday, October 24, 2016

Control Inflation and Dealing with Globalization to Realize the People Economy

(控制通胀应对全球化 实现人民经济)
夏伟文 & 陈薛卉 (18 January 2016)

Another two obstacles towards achieving people economy highlighted by Dr. Robert Pollin are (iii) controlling inflation and (iv) countering the pressures resulting from globalization, including the trade deficit, immigration and managing foreign exchange. Implementation of Goods and Services Tax (GST) and continuous depreciation of Ringgit would likely to cause cost-push inflation and import inflation. Globalization and liberalization of financial sector have already altered many economics theories. The United States’ Trans-Pacific Partnership Agreement (TTPA) and China’s “One Belt, One Road” Initiative will bring impact to Malaysia but unsure for good or bad. These challenges are like waves of tsunami that can easily drown an emerging economy like Malaysia.
Controlling inflation
Malaysia’s official consumer price index (proxy for inflation) averaged about 2.25% in a period of 15 years from 2000 to 2015. The inflation rate looks small and smaller than the growth rate of nominal Gross Domestic Products (GDP) (see Figure 2) for most of years since 1961. Is there a problem? Let look at the practical aspect as follow.
A pack of nasi lemak sold at RM1 in 1999 (sometimes can get it from as low as at RM0.60 during those years). Take that price and times with 1.0225 every year until 2015. This is known as “compounding” and it is easy to calculate with Microsoft Excel. You will get about RM1.40 per pack at 2015. A cup of Chinese tea for 30 cent in 1999 theoretically should sell at 40 cent. In city or highly populated area (usually university and commercial office area) the prices are much higher. In Bandar Sungai Long where a popular private university is located, Chinese tea is selling as high as 70 cent!
Figure 2: Malaysia Inflation and GDP per capita growth
(Data sourced from World Bank)

Worst case is housing price versus salary. A normal (about 1400 square feet) double story link house of RM250,000 in 1999 compounded at 2.25% annual inflation should be sold at RM357,000. Now, such price will not get you the double story link house especially in urban area. Price of a comparable house can go until RM600,000 to RM800,000 in Kajang and reach RM1 million in highly populated area like Petaling Jaya. A fresh university graduate can get RM2000 to RM2500 per month salary in 1999. Theoretically with 2.25% compound inflation, they starting salary now should be about RM2900 to RM3600. Is there any company willing to pay that salary to a fresh graduate? Then, can university graduates afford to own a house? This is impossible especially if they need to first buy a car to enable them to go to work unless they have rich parents or exceptional talent. Do not forget the cost of food and other living expenses also increased.
Pensioner will find their saving depleted fast through inflation and weakening of Ringgit. Middle class citizens, who spend heavily including overseas trips and imported goods also suffered. Parents who need to send their children to study overseas or at least bought imported textbooks need to fork out more expenses. Therefore, is “people economy” going to exclude the welfare of youthful fresh graduates and old pensioners?
Depreciation of Ringgit benefits export-oriented businesses most due to higher price competitiveness that more than offset higher costs of production due to inflation of inputs cost. However, how large is this benefit from increase export versus the burden of all citizens to pay higher price for imported goods? Will benefit to export business trickle-down to overall society?
Inflation is getting harder to control after GST and huge currency depreciation causing hardship to almost all levels of society. If social welfare is negatively affected, is the country still rightly moving towards people economy?
Countering the pressures resulting from globalization
Nowadays, what happened in other countries is no longer “none of our business”. What happened in financial market may affect foreign exchange and real sector as a result of globalization, liberalization and digitalization. Major international development affecting Malaysia are Trans-Pacific Partnership Agreement (TPPA) and China’s “One Belt, One Road” initiative.
Exclusion of China, the largest economy in the Pacific Rim region in the TPPA is greatly disturbing. Center for Research and Globalization (Canada) is concerned about TPPA’s strategic policy function. Is TPPA being used to harness the power of the developing nations throughout ASEAN as an economic counterweight to Beijing for the benefit of the United States? The research center also highlighted two matters which could be the biggest challenges for Malaysia policy makers as follows.
(a) TPPA has Investor-State-Dispute Settlement (ISDS) mechanism, which would allow corporations to seek restitution against states in an international arbitration court for the contraction of their potential future profits as a result of government regulations. In another words, Malaysia’s government can be sued and needs to compensate foreign corporations for any policy to protect the interest of local industries. Subsidies for welfare of the poor can be deem “unfair competition”.
(b) On human health and well-being, TPPA urges for (i) unimpeded entry of genetically modified products into domestic markets, (ii) gradual elimination of tariffs on alcoholic beverages and tobacco, (iii) drastic extension of patents on pharmaceutical products that will impede access to affordable medicines and (iv) require Internet Service Providers (ISPs) to more actively monitor users to enforce copyright protections at the expense of individual privacy. All those examples are what Malaysia cannot (and should not) do all these years. Are we going to chance and scarify the welfare of the people just to join an international trade agreement?
Historically, on January 2009, Malaysia has suspended negotiation of Malaysia-US Free Trade Agreement (that started in 2005). Despite official reason for suspension is United States supported invasion of Gaza by Israel, the real reason could be many demands of the trade agreement that conflict with Malaysia’s national interests. If it is like that, what reason for Malaysia to agree to TPPA? Indirect conflict between TPPA and China’s “One Belt, One Road” remind us of cold war between United States and Russia. Therefore, it may create unpleasant relationship between Malaysia and China if we join TPPA.
Like TPPA, China’s “One Belt, One Road” initiative also posses challenges. A simple Google Image search for “New Silk Roads” will show the Economic Belt involving physical roads or railways through northern China to Middle East before links to Moscow and Europe (Turkey, Rotterdam and Venice). Meanwhile, Malaysia’s main export and import destinations in 2013 are Singapore, China, Japan, United States and Thailand. Thus, major nations (except China) that “New Silk Roads” passes through are not much relevant to Malaysia’s international trade. However, “One Belt, One Road” initiative gives opportunities as well as challenges in term of China’s investment inflow to Malaysia.
Table 4: Major Foreign Direct Investments Inflow
Country
Jan-Sept 2015
2014
Projects approved
Amount
(RM million)
Projects approved
Amount
(RM million)
Hong Kong
9
4,374
5
70
Japan
52
2,705
55
10, 870
USA
12
2,205
23
1,350
Singapore
78
1,598
121
7,822
China
12
1,197
24
4,752
Germany
18
1,149
13
4,417
South Korea
16
   678
11
1,549
Source: MIDA (2015) available at http://www.mida.gov.my/home/facts-and-figures/posts.
Based on Malaysian Investment Development Authority (MIDA) statistics in Table 4, China (exclude Hong Kong) is fifth largest foreign direct investment (FDI) inflow country in Malaysia. Will China’s and Hong Kong’s FDI inflow increase drastically if Malaysia’s trade and foreign policy pro-China rather than pro-United Stated?
Besides international trade, Malaysia also facing challenges in the aspects of digital globalization, international migration (includes brain drain and political refuges), possible global economic crisis and extremism/terrorism. Each of these could bring deadly effect to Malaysians and therefore our path towards people economy.
Conclusion
Inflation and globalization are twin challenges Malaysia facing domestically and internationally. As harvest will only comes after hard work of planting, overcoming challenges can brings positive effect. Yet, we need to first understand what are the challenges or obstacles along our path towards people economy.

[Chinese version published at 南洋商报经济周刊 Nanyang Press – Business News, page A8 on 18th January 2016. Available online at http://www.enanyang.my/news/20160118/控制通胀应对全球化br-实现人民经济. This English version may be slightly different from the Chinese online/printed newspaper version]

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