Tuesday, November 01, 2005

Govt should focus on controlling inflation

In the past week, I have been in contact with several of my close relatives in Malaysia. Apart from exchanging family news, wishing each other Selamat Hari Raya and enquiring the experiences of Ramadan, we also talk about each others’ lives.
This year, they all complained of one thing; grocery items are becoming more expensive, their incomes static or becoming less. Inflation is running rampant, and it’s affecting ordinary folk more than ever. Prices of goods are rising fast, which indicates demand for goods outstrip supply.
While its okay to blame the causes of inflation as largely imported, (rising fuel prices, and the emergence of China and India as consumer society) some of our policies also contribute to this problem.
For the past few years, government has been using monetary and fiscal policy to get us out of economic slowdown. Meaning we have been printing money, encourage spending and consumption as well as awarding large infrastructure projects in the name of national development and increasing income. (Keynesian)
There is nothing wrong with monetary expansion during recession. It lowers interest rate, encourage investment and subsequently create jobs – but continuing monetary policy after a few years of economic growth and in the environment of accelerating inflation will only stoke inflation further, thus undoing the prosperity gains of the previous years.
This year, the government budget is still in deficit, with stated policy of continuing with monetary policy (print more money). This simply means the government is postponing the increase in taxes for high and medium income earners, hoping that with expanding economy, next year there will be more income, which would be enough to cover the deficit, thus negating the need to increase taxes to plug the deficit.
This may avoid government from making unpopular move of increase taxes, but insidiously imposing inflation tax for general population. (Inflation is a form of tax – government get the revenue by printing money)
No doubt large numbers of Malaysians benefits from the economic growth of the pasr few years. We can see the evidence from expanding new suburbia outside Klang Valley, Johor Bahru and Sg. Petani as well as the choked roads and motorways full of cars. People who benefit most are the well-connected and the street smart. Low interest rate from expansionary monetary policy enables them to borrow money at cheap rates to buy assets and set up businesses that won the government and business contracts large and small.
Now that they earn more, have more money to splash about and consume more. These are the people that government should tax more – the high and medium income earners.
It has been reported in the news media that since Abdullah Badawi took over, government projects has dried up. In other words, government spends less. In economic terms, this is fiscal tightening with the benefit of lowering interest rate. More funds are now available for businesses for their expansion and investment.
I have no scruples with the government giving more incentives to businesses to invest more, as this would create more jobs and income, increasing supply of goods in the market. Supply side economics if started now, would contribute to reduce shortages in two to three years time.
More drastic action has to be taken now, by taking steps to curb demand. Inflation tends to feed on itself, a round of price increases will stoke more and more price increases in other sector of the economy.
The real losers are the people who are on fixed or low income – their money worth less. Ahh, don’t suggest that enforcement officers should check prices at vegetable markets, that will only exacerbates the scarcity, as traders will sell less of controlled and unprofitable goods. Those officers would be better off employed to grow vegetables and other foods at least that will increase supply.


Anonymous said...

Your are absolutely right. Inflation is creeping in and not much the
politicians are putting their thoughts into it.
The consumer price index is faulty, and nobody notices it nor care to
comment about it. In fact inflation in Malaysia is high if you use just the
"roti-canai index". I mean when I was at school decades ago a piece of roti
canai was just five sen. Now it is on average one ringgit, which in my
calculation has brought inflation to around 5% per annum, compounded.
I doubt, but I don't really know if income of the ordinary guy on the street
has increased by the same percentage.

So you see nobody pays attention to what really matters in the economy. Why
not someone in politics think about this creeping menace to your livelihood.
Remember in his decades of leadership at the Fed,. Reserve Alan Greenspan's
greatest contribution to the American economy is his effort and ability to
control inflation and stabilise the greenback.Do we have a Greenspan out
here to really care about the economy?

Anonymous said...

yes, the banking industry is creaking too. housing and credit card
loans showing weakness, first sign of trouble already

Anonymous said...

We are in a similar situationas we were during Tun Razak times.... 1973 I was 6 years old. Petrol price went up...Inflation was rampant. But those days it was worse as we were queing at the pump...komplot sorok....no price control.

I think we should still be using monetary and fiscal policy( good Keynesian policy) to get out of this. However mind you we are an oil exporting nation, should be able to counter balance government deficit with an increase income through oil revenue without increasing income tax of the mid and high income group. Remember the guys in this tax bracket (this mean guys who are on internet and have broadband; you and me) are the one that generating the economy in Malaysia, should be punished for this. Its like killing the goose wich lays the golden egg. Flat tax rates and tax cuts , like they're doing in the US should be the way forward.

I think there is nothing special about Allen Greenspan. The only thing that he did right is to reduce interest rates to generate the economy. The real revolution in his era was the advent of China as producer of cheap consumer goods as well as the advent of the internet which increases the American productivity by ten-fold.

Anonymous said...

Dear Sir,

I beg to differ. Anwar was and still is a fine politician but was a very bad finance minister! During the Asian Financial crisis of the mid 90's he really did panicked. He was towing the line of the IMF and frequently conferred them on matter of Malaysian interest.

He re-defined the non performing loan (NPL) by half the time from six months to three. He wanted to increase BLR to double digit. He allowed the Ringgit to go on a free fall in the belief that the market will adjust it to the so called "true" value. He didnt grasp that certain individuals and groups were short selling the ringgit as well as other S.E.A currencies.

The combination of increase NPL as well as high BLR meant Small medium Industries mainly Malay owned would have had to default. Banks would falter. Once this happens, Foreign interest would then take over. Proof of this Bank of Korea, Daewoo etc all in foreign(American ) hands.

We would have handed over the books to the IMF. This means that monetary inflows and outflow would have gone through Washington DC. East Asian tiger economies are still recovering from this. However we are blessed with oil. We could peg our currency to the dollar, similar to what Hong Kong and China has done. Indonesia wanted to do the same but they didnt have substance in their currencies so they defaulted and sold their souls to the IMF

But history was kind to us, our YAB was unseated from his position albeit unceremoniously. The peg worked, the shortsellers burnt their fingers as they couldnt trade our ringgit offshore. We basically exported our way out of trouble with the 70 months straight trade surplus.

Anwar is a fine character but was a very bad economist and didnt choose good advisers in his path to the top.

Dr Firdaus

Anonymous said...

Adreed with your views Doc. The YB was a very good guy, man of the people, likeable, a humanist and also a good politician, but like you said he did not grasp the mechanics of an open economy. But mostly his advisers were taking advantage of him shamelessly.

nooryahaya said...

dear Doc,
i was referring to the steps he took to prevent inflation from starting to bite in 95. he uses compulsory savings regulation to rein in inflation. now we cannot use that, because of negative return, unless you invest overseas. thats why i suggest increase tax, to make some people feel poorer so that they rein in spending. hence hopefully inflation. that economic meltdown deserve another title of discussion altogether. anwar's handling that time was classic textbook example, if you follow texbook. i didnt like his increasing interest rate to 16% that time. he could have done a better job convincing his boss not to build so many grandiose projects even from way back 93. IMF like projects for the people better-housing, necessary infrastructure, food etc.
nor mohamed yakcop done a good job, plugging the leakages and stuff. but rendering ringgit worthless overseas is like robbing those people their off money. remember paper money is like cheque, you shall honour it when the holder come back to you. even if you are targeting speculator. what about those genuine people? i am not making moral judgement, becoz i am not that good