Saturday 12 October 2013

How the middle class is subsidizing the Corporate Elites and why it has to stop

There is a feeling that Malaysia’s middle class are generally not a happy lot. Many moan about the rising cost of living, education and healthcare, their relatively low wages and rising debt as they borrow more to buy homes and cars.

Is their financial pain a mere perception and nothing more than the usual middle-class gripe or is it a reality? And what can we do to resolve this?

We dug up some numbers and analysed them in an attempt to seek some answers.

Our extrapolation of data from the Employees Provident Fund shows that the income levels of Malaysians have generally kept pace with economic growth, and have outpaced inflation.

Between 1990 and 2012, Malaysian wages, as extrapolated from the EPF data, increased from RM7,039 to RM31,426 per person (see Chart 1). Income growth during this period averaged about 7% per year. On a macro basis, looking at the labour costs’ share of Malaysia’s GDP, the ratio has also been relatively constant throughout the years.

What is interesting, though, is that the growth in the average Malaysian worker’s income — in local currency — has actually accelerated in the past decade, even faster than in the US.

Average income levels, in ringgit terms, have grown between 1.6% and 13.8% annually, doubling between 2000 and 2012. Combined with a ringgit that has appreciated after being unshackled from its peg, Malaysian workers have actually gained in terms of purchasing power over the past decade.

If wages are rising, why is there then discontent among the middle class?

One reason is because there are actually two types of “middle class” in Malaysia. One is the “urban” middle class, which is unhappy. 

The other is the “rural or semi-urban” middle class, which is relatively contented. Their incomes have also risen, but their cost base is very much lower.

The disconnect in expectations between the two middle classes was evident in the recently concluded general election, when a majority of the urban people voted for Pakatan Rakyat while those in the semi-urban and rural areas supported Barisan Nasional.

How did this disconnect come about?

A major problem lies in the weak ringgit, which results in different purchasing power for the two “middle classes”.

The ringgit crashed during the 1997/98 Asian financial crisis, and was subsequently pegged at RM3.80 to the US dollar from 1998 to 2005, from around RM2.50 before the crisis (see Chart 2).

We estimate it took eight years — from 1997 to 2005 — before income levels reached 1997 levels again in US dollar terms. It is only in the past seven years that Malaysian income in US dollar terms has started growing again but it is still low.

In US dollar terms, Malaysian salaries are 22% of the level in the US, 16% of Australia and 24% of Singapore. It is true that the cost of living in these countries is much higher, and one should not compare apples with oranges. But if we compare purchasing power based on McDonald’s Big Mac index, which is widely used, we are still very much worse off.

Let us look at the statistics.

In the US, average salaries are US$3,643 per month and a Big Mac costs US$4.37. A worker there gets to buy 27 Big Macs a day.

In Australia, the average monthly salary is US$5,169 and a Big Mac costs US$4.89, which means a worker there gets to buy 35 Big Macs a day.

In Singapore, a worker gets to buy 23 Big Macs a day based on his monthly wage of US$3,417 with a Big Mac priced at US$4.85.

In Malaysia, the average salary is US$830 and Big Macs are priced at US$2.62. The Malaysian worker gets to buy only 10 Big Macs a day — less than half of his peer in Singapore and the US, and one-third of his peer in Australia (see Charts 3 and 4).

The comparison using Starbucks is even more telling, as a cup of Starbucks coffee is priced roughly the same throughout the world — in US dollar terms. Using the Starbucks comparison, our purchasing power is 26% of a worker in the US, 20% of Australia and 31% of Singapore (see Chart 5).

One could argue that not all of a person’s expenses are US dollar-denominated or consist of imported products. But in an increasingly internationalised and commercialised world, sadly they are.

The reality is that the urban middle class has a lifestyle and consumption pattern that is largely US dollar-based or dependent on international prices — from dining, groceries and shopping to education and travel. This class is feeling the squeeze due to the weak ringgit.

In contrast, the rural or semi-urban middle class is not feeling the pinch yet, thanks to a different consumption lifestyle. They substitute Ramly burgers for Big Macs for half the price, and drink kopi-O at the “Mamak” restaurant instead of Starbucks for a fifth of the price. This class is largely contented, and also largely pro-establishment.

Indeed, if we were to create a “Ramly index”, the purchasing power of this class of consumers would be roughly the same as those who consume Big Macs in the US, Australia or Singapore. They will get to buy roughly 21 “Ramly” burgers a day (see Chart 6).

Ringgit kept weak to help industries

The weak ringgit is clearly a major problem for the urban middle class as local salaries can’t keep up with an increasingly US dollar-denominated and international cost base.

Why did the currency weaken?

The main reason was actually our own industrialisation policy, which was started by former prime minister Tun Dr Mahathir Mohamad.

Mahathir took office in 1981 and introduced a well-intended policy to transform the economy into a newly industrialised country. The policy centred on attracting foreign direct investment (FDI), especially from Japan and East Asia with the “Look East Policy”, and the creation of a corporate elite class, especially among bumiputeras.

The strategy saw many successes. FDI poured in strongly, and Malaysia was viewed as a roaring Asian Tiger in the 1990s. A largely agriculture-based economy was transformed into an industrialised one. Our large middle class today is a successful creation of that policy.

However, there were also unintended consequences of that policy on the ringgit.

To make Malaysia more export competitive, the ringgit had to be kept low. With export sales denominated in US dollars and costs in ringgit, a lower ringgit helped to make products cheaper in US dollar terms and, at the same time, boosted the profits of Malaysian corporates and industries.

This was further assisted by a policy that kept interest rates low and reduced the funding costs for big businesses to grow through debt.

In fact, real interest rates were very low and negative in some years, even though Malaysia’s Consumer Price Index understates real inflation for urban dwellers. The ringgit has also been on a depreciating trend since 1981, even before the big decline during the 1997/98 Asian financial crisis (see Charts 2 and 7).

The weakening ringgit was also a consequence of the fact that many of these new industries were not globally competitive. In other words, we had import costs from a weak ringgit but no export gains for some of our huge industrial projects.

The strategies and consequences above helped create the corporate elite of all races.

The effects of this policy are now mostly felt by the urban middle class who suffer from low US dollar purchasing power and negative real interest rates on their savings.

Eventually, though, the rural and semi-urban middle class will begin to feel this as their lifestyle changes. Going forward, this is a potential political risk for Barisan Nasional.

The solution: Promote a stronger ringgit

Mahathir’s economic policies worked well in the past to industrialise Malaysia and created the middle class. It was indeed necessary in the 1980s with high levels of unemployment and fluctuating commodity prices.

Today, however, all our cheap labour consist of foreigners. FDI is falling. The old low-cost manufacturing hub model no longer works, and indeed it now creates major social costs and problems.

A new strategic policy is needed to bring the country to the next stage.

It is time to have a policy of positive real interest rates and to promote a gradual appreciation of the ringgit.

Corporates and industries must be forced to become more efficient and make products that are more globally competitive, and capital must be more efficiently utilised. We can learn from countries that have successfully moved out of the middle-income trap.

This report and the accompanying charts are published in The Edge, Oct 14-20 issue.


  1. Interesting article, now we have Starbucks & Ramly Index created by TKO. Firstly, you can blame Urban folks feeling discontent & unhappy; the reason is simple, they are more educated, explose to modern & complex environment. I think promote strong ringgit is one of the way which can bring Malaysia to high income group. However, with current government policy who keep borrowing ( now extend to 30 years!) & the brain drain issue, I don't think Malaysia will turn into a high income group nation. I still insist we need to overhaul the whole government & rectifying the root of the problem. Selangor & Penang has showing the sign we are heading to a better day. In a nation, when the Gov is not doing the right thing, it is useless even we are keep shouting here and there....In Malaysia case, the government will use whatever way to retain their power even they need to scarify the good & keep the bad & ugly. We are living under an uncivilized Government. Their whatever perfect plan onlh remain in paper & advertisement. Wiseman know they are bullshiting when come to real real implementation. Cheers & have a good day, Mr. Tong.

  2. I mean u can't blame urban folks.....

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  4. A more equal, just & merit policy base society will prosper more citizens.
    Those who than who still can't earn enough-can only have themselves to blame!

  5. Bravo. Couldn't agree more. I'm one of the urban lower middle class.
    You'll hate Ringgit even more when you travel to countries like Australia and US. This is really unfair.

  6. And how should we consider the takeover of CCB, which became Alliance Bank?

    1. Are you referring to the takeover of Co-operative Central Bank (CCB) by Phileo Allied Bank (PAB)? PAB was actually United Overseas Bank (UOB) of Malaysia. It was acquired from UOB Group Singapore. The current UOB Bank in Malaysia was the amalgamation of Chung Khiaw Bank and Lee Wah Bank, all three banks were at that time owned by UOB Group Singapore.
      FYI, CCB is a co-operative, NOT a bank. It had RM600mil of deficit when PAB took it over.
      To differentiate myth from facts, kindly read the book "The Phileo Story".

    2. CCB was a non-bank financial entity owned by a number of co-ops. I know you wrote about thie takeover of CCB as being "public service", but really ....

    3. And by the way,where did I refer to CCB as a a bank?
      My comment as above,was:
      And how should we consider the takeover of CCB, which became Alliance Bank?

      As for the deficit; the facts are that the shareholders, from whom BN seized the bank using its special powers, were prepared to negotiate with the the then MOF and BN to put CCB back on track -they were refused.The Alliance BAnk takeover was, at best , an act of charity looking for a beneficiary.

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  8. Instead of promoting a stronger Ringgit, limiting the use of foreign labour would be a better strategy in moving the country upwards. It has become an addictive to companies for them to boost profits, it has made people to be lazy of thinking of ideas. An effective and forceful policy in limiting the use of foreign labour will be the jolt this dreadful economy needs to start the innovation spark. We need to lessen the reliance on foreign labour. If we never do that, we will never innovate to make more money.

  9. mr. tong,
    totally agreed with your article but with BN in power and Dr. Mahathir still have so much influence , what you wish and most m'sian wish will remain a dream.,,,,,,,,,,,,,,,,,,,,,,,,,,

  10. The analysis is rather incomplete and simplistic. You have not really given an in-depth analysis on income of the two segments, the urban and the rural. No in-depth analysis on the cost elements that adversely affects the rural. Just look around beyond 15kms from town centre (excluding KL) facilities and amenities are deplorable and the quality of life is nothing to shout about. There is so much inefficiencies created by the public and private sectors in running the economy causing pricing of goods and services to be exorbitantly high. Corruption, collusion and monopolistic to maximize profits are rampant and everywhere.

    1. The goal of all researchers is to contribute to the knowledge pool and hope others can improve on their work. A report that provides the analysis of global warming will be incomplete and simplistic to someone who wants to know if the solar system is warming. All analysis starts with a hypothesis. This determines the relevant data to analyse, taking into consideration what data is available, credible and consistent. Sometimes you sacrifice some details, some specific conclusion in the interest of data integrity or for a conclusion that meets general interest.

    2. Kindly look at other number such us; Debt over GDP, corruption index, investors confidence, real spending power (properties price has gone up like crazy for the last 20 years, a fresh grad can't even own a flat nowadays, is our current gov. protect local citizens own properties like what Sg Gov do?); is the gov import top brains or brainless people. Let face it, Malaysia is at the cross road, and heading to doom day...forget about 2020, it is just remain a dream created by a spinning doctor who only know how to take care his cronies & family.


      Malaysians serve almost RM42 millions per DAY!!!! It can used to hire many top programmers, researchers, scientists, economists etc to develop this nation. Sadlly, all this monies used to feed the corrupted politicians & their cronies. What a big joke that many tainted politicians still elected to continue suck this nation wealth.

    4. RM 42 millions interest per day!

  11. Mr Tong, say today mr in power ask you to run Another Phileo Allied 2 ? Would u leave it or take it?

    1. I've enjoyed my life's journey. I'm very blessed. Few have the opportunities I have been given. There's so much more I'd love to do as I look forward, and with so little time left, why would I want to relive my past?

    2. Only idiots will regret their past, in fact I think the past sharpen our future... Turn your history to the future success

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  13. Thanks for bringing up the issue. I would agree with you on some fronts about the middle class being squeezed. On top of the cost structure, I would also imagine the middle class would be the biggest group contributing to Govt taxes and directly contributing to its fiscal policy. As a citizen that would like Malaysia to be all that it can be, perhaps you could do a follow up article (or maybe articles) that provides solutions that could be put into place to re-engineer our nation. I suggest that this to be done methodologically, time-based and without fear or prejudice. One interesting angle that I would certainly like to see the follow-up on is a study of other nations and their solutions of getting out of the middle income trap. Keep up the good work.

    1. Mr tong , u r a smart person. What will u advice our government in reducing debt ? I see this is a serious enoUgh problem that Moody's downgraded our country . Is it right for the government to just reduce subsidy - this is again like taking money from the poor to give to the rich , as whatever money saved will then be spend by the politicians who will devide major projects/contracts among them. What else can be done ? Reducing wastage ? Why do our government has this habit of borrowing too much and bailing out companies ? Also what do u think of 1mdb a company related to najib which is in huge debt ? Will it again be bail out if it fails ?

  14. Once rating downgraded , borrowing cost goes up, interest rates may balloon upwards triggering mortgage bubble to burst . Bond market and Malaysia gov securities may become illiquid and need to pay higher rate . Will we end up become like Greece or the PIGS? Ringgit will be dump and become really worthless. During dr m era this is what happen and created opportunity for soros to destroy the Asian tigers economy . I heard we owed 80 sen for every ringgit now . Will history repeats itself ? What do u think are the potential crisis that may happen ?

  15. Big Macs vs Ramly.
    One in sold in a proper restaurants and the other a road-side stalls. The 2 are not really comparable. Should Ramly be required to be produced in the same standard as Big Macs, I speculate; it may cost more than a Big Mac in Malaysia. It boils down to quality and standard of living. Do we want to be living on Ramly standard? (Don’t get me wrong, I am not implying one is better tasting or healthier than the other).

    Look East Policy
    Japan is in recession for 2 decades. Will Abenomics lead Japan out of recession or into her 3rd lost decade, only time will tell… I reckon we should be looking east for the cause of failure as well instead of for inspiration only.

    Strengthening MYR
    Strengthening MYR alone will not save the nation. We need to have industries that are competitive globally. Back to our Ramly, the day when Ramly can be sold globally, we can consider increasing interest rate and strengthen MYR. In which case, MYR should strengthen naturally by market force.

  16. Corruption is the root of all problems . Until we put some incumbent politicians to jail , they can continue milk our country like cow. We shld also separate the PM and finance minister post , as if same person is holding the post d it will be open to abused

  17. In order to move away from low cost manufacturing base, Industries in Malaysia have to invest in R&D, automation, and move up the value chain. However, many business owners are reluctant to do this as it requires significant investment and risks. Second in order to upgrade the capabilities, business need to hire and pay more to talented employees, and to retain capable ones as well. Many business owners here are reluctant to do that because they dont see their employees as an asset to the firm. It is unfair to blame government policies entirely for the weak economic state. Private/Exporting sector have to bear part of the blame also for being complacent.

    On the consumer side, many young professionals who grew up in the "MTV" era, have fallen prey to consumerism. Many equate purchasing power with status and success. While that may be somewhat true, but many forgot that their parents built their wealth and purchasing power on the principle of "delayed" gratification (saving, investing), while the younger generation is inclined towards instant gratification. which have led many in serious financial trouble.

  18. I would like to highlight a few things. First, your article started off very interestingly. You rightly pointed out the BigMac Index and the Ramly index, interesting and good work. Congrats. However, you blamed the problem of the nation on a weak ringgit, which is extremely surprising. You will need to understand the issues you presented yourself better, in order to answer it.

    Just how do you plan to revalue the ringgit upward? Are you saying BNM should manipulate its value as once done in the 80s vis a vis the SGD with disastrous consequences?

    Are you saying that BNM/Gov is weakening the ringgit on purpose? And how did they accomplish this? What were the exact steps taken? If they print more money than they should, it will reflect on the money supply. Can you confirm this is happening? Further, government money printing is beneficial to the, well, the government, as it gets more money (invisibly) from the populace.

    So now in order to normalize things, are you saying BNM should stop printing more than it should? And if it stops printing more than it should, then the ringgit will simply maintains it value, not going down, but surely not going up either.

    Then are you now suggesting that the value of the Ringgit is increased by asking BNM to starve the country of a needed monetary supply so monetary demand would be more than its supply, so the value would rise? This may cause other unintended consequences such as deep recessions and stagnant wages, exactly the things you wanted to avoid in the first place.

    The lesson here is, the ringgit is never the problem. Manipulating it will only brings in cosmetic changes, and the worst is recessions. We should simply maintain the ringgit's value as where it should be, as and when it is demanded by economic participants.

    For your information, the government has the power to set the exchange rate of the ringgit via Bank Negara. Whatever we want, it can be done. We did it before in 1998, where it was set at 3.8. It can also be set at 2.8, 2.5, or one to one, it does not matter; it can be done. Of course the problem is that by doing so, will not make anyone rich. Thus your conclusion on increasing the value of the ringgit gradually to escape the middle income trap is not possible. Everyone must actually be doing good and productive stuffs, in order to move up. Exchange rates are simply relative, and 'always' in equilibrium.

    Just look at Japan, everything is playing out before our eyes. Japan devalued its currency (weakened it) so that their products are cheaper. They are inflating their economy with newly printed money. With such devaluation, of course their exports "seems" to increase, but look at their imports, it increased the same way or even more! It pushed their trade deficit higher. Unlike Japan, Malaysia is a nation that trades heavily. We trade as much as, or more than our GDP itself. So is Singapore.

    Therefore you should reassess your conclusion and find out what is the real root cause. I can of course, offer you assistance should you require it (time permitting of course). I very much think that you and many others already knew the answer. The real question would be, "Why can't we increase our own productive capacity so that we upgrade our lives (so we are richer)?". Currencies are just relative, it was not the issue in the first place. Are Malaysians reading plenty of books? (no). Are we opening up and liberalizing our economic sectors? Are we reducing subsidies to prevent misallocation of resources? These kind of questions is the things we should really look into, not the exchange rate of the ringgit.

    Overall, keep up the good research and we need more people to be creative and aware of their economic system.

    Sharif Rahman
    Co-author of 259 Trillion Vs 5 Trillion Series

    1. Our article provided a factual observation. That middle class purchasing power was weakened by the lower Ringgit. Clearly, the implication is that our products and services were not as competitive globally.

      A policy of gradually strengthening our Ringgit is not about currency fixing. It is a message to private sector that says "better buck up" as we will not allow you the easy route of exporting and maintaining your profits through lower exchange rate.

    2. Mr Tong,

      1. Your article was factual, but it does not provide proof of cause and effect, just correlations. It also ignores external factors that have weighed on the Ringgit exchange rate.

      2. In addition, the impact of our allegedly weak exchange rate on export competitiveness is fairly marginal. Malaysia is part of the East Asian supply chain - our exports are not all finished goods, but primarily either raw materials (oil, cpo), or intermediates (pcbs, chips, leds). These in turn require other imported raw materials or intermediates. A weaker currency makes exports cheaper, but imports more expensive. A stronger currency makes exports dearer, but makes imported inputs cheaper. As a result, trade in East Asia does not behave as predicted by standard economic models. Nor will a strong exchange rate policy have the kind of incentive effect you think it will - the effect on export profit margins will be much smaller than any given appreciation of the exchange rate.

      3. A policy of gradual appreciation IS in fact a form of currency fixing, because it implies a stable (if rising) path for the exchange rate over time. Similarly, so too is a policy of progressively weakening the exchange rate. A fixed exchange rate is just an extreme form of this policy approach.

      4. The implications of such a policy, both in economic theory and practice, is also clear: you must either give up monetary independence (control over domestic interest rates) - Singapore's choice - or impose capital controls - India's choice.

      5. Previous historical experience suggests that the message that the private sector actually gets from overvalued exchange rates is "close shop or leave".

  19. I agree with Sharif. My own comments won't fit in a comment box, so with your permission:

  20. Our currency is weak because 1)huge pile of debt 2)poor exports which overly depend on oil palm prices 3)corruption - money siphon out and gone no trace . Ringgit was sold like garbage to buy USD and USD is then siphon out 4) uncompetitive goods and products which can't make it / sell in international markets 5) our currency reserves in USD is not enough . it's too tiny 6) wastage - every project the politician and his son will eat up the money and transfer overseas 7)internationally ringgit is not widely accepted , they view ringgit just like our politicians - "garbage"

    1. @OS,

      When arguing over economic matters, one should argue from the facts:

      1. Malaysia public debt to GDP 53%, US >70%. Public contingent liabilities for Malaysia is around 45%-50% of GDP, for the US 500% of GDP.
      2. Palm oil (including derivatives) is just 6% of Malaysian exports
      3. >80% of illicit outflows involves trade mispricing, which involves no direct flow of funds
      4. Most Malaysian exports involve raw materials and intemediate products, not finished goods
      5. Malaysia is in the top 20 countries in terms of holdings of foreign exchange reserves, incidentally ranked just below the US. However, most of Malaysia's reserves are in marketable securities, US reserves are mainly in the form of IMF contributions and SDRs
      6. See point 3. Most of the money "siphoned" out is by multinationals
      7. The Ringgit is non-convertible overseas, and BNM has not given a timetable on when this might change

  21. Are you working with the gov ? Where do u get this so call "facts" ? How do u explain large outflow of funds to cayman island entity for 1MDB ? if ringgit is non convertible overseas ? I just covert ringgit in a neighboring country . U cant compare msia and US public debt as US is a superpower and has the ability to print money to repay it's debt as USD the world reserve currency .. Better get your facts right .

    1. OS,

      I am an economist, and I work in the private sector. I deal with these numbers every day.

      1. 1MDB borrowed in USD, not in Ringgit.
      2. If you converted Ringgit overseas, then whoever converted the money for you risks not being able to reconvert again. Bank Negara will not accept redemption from overseas counterparties, which is what non-convertibility means.
      3. Any sovereign country can print its own money, not just "superpowers".

      But if you want comparisons, here are the debt levels for countries around the same level of per capita income as Malaysia (all as of 2012):

      Venzuela 57%
      Uruguay 53%
      Turkey 36%
      Seychelles 82%
      Russia 11%
      Poland 55%
      Panama 39%
      Montenegro 51%
      Mexico 43%
      Mauritius 50%
      Maldives 77%
      Lithuania 39%
      Libya 0%
      Lebanon 139%
      Latvia 36%
      Kazakhstan 12%
      Iran 10%
      Hungary 79%
      Grenada 112%
      Gabon 21%
      Dominica 72%
      Croatia 56%
      Costa Rica 35%
      China 23%
      Bulgaria 18%
      Brazil 68%
      Botswana 15%
      Belarus 37%
      Azerbaijan 11%
      Argentina 45%

      Some are higher, some are lower, but Malaysia is hardly unusual. In fact the global average is right at 50%.

    2. 1) You still don't get it . Only the united states can print USD. Can Msia print USD to pay its debt in USD ?
      2) 1MDB borrowed in USD , but where the money come from ? It's from using our ringgit to convert to USD . And do u know where the ringgit come from ? It's from the rakyat .
      3) now u say it can be convertible - u are so very funny

    3. 1) What debt in USD?

      2) What makes you think they borrowed in Malaysia? As I recall it was a global offering handled by Goldman Sachs.

      3) My use of the term is in the technical sense. Is that so hard to understand?

    4. If u are in fact economist and can't understand fundamentals of economy I think u shld go back school take economics 101 again .

    5. OS,

      In other words, you can't answer what I've said.

  22. Msia debt as % of GDP if including the debt guaranteed by the gov would be 80 %. For a county that owes 160 billion USD in debt and have 130 billion USD what does it tells u ? Our net reserves is minus USD 30 billion or more !

    1. OS,

      In Malaysia, reserves have almost nothing to do with government debt because public external debt in foreign currency terms is just RM16b. Everything else is in Ringgit. Moreover, reserves are carried on BNM balance sheet, not the government. It's not the government's money. Your statement is meaningless.

      And I gave the US comparison in my first reply to you. Govt guaranteed debt in Malaysia is 45%-50% of GDP, which includes both explicit and implicit debt. The US number is 500%.

    2. I think u r compare a cat & a lion in a jungle. US is the only country that can print money freely. USD is just like the blood in the body system, even it is a toxic blood, it needed to keep it's he body alive! Just pick one of the BIG company listed in NYSE or Nasdaq, it market capitalization is already more then Malaysia GDP. In many aspects such as economic, politic, socials & military; Malaysia is just a weak cat in a huge jungle where else US, China Japan are like lions & tigers. So please don't use US as a comparison if u really understand how the whole world economy function.

    3. @Mike

      "US is the only country that can print money freely."

      What the Federal Reserve is doing right now is not "printing money", which actually has a fairly technical meaning - direct purchases of securities by the central bank from the government. In the Fed's case, they are buying off the open market. That may sound like a negligible difference, but the financial and economic impacts are not the same.

      Be that as it may, if I take it in the sense that you mean, I'm afraid you're wrong. Japan pioneered QE in the 1930s, and has been doing it in a big way since the bubble popped in the 1990s. Abenomics accelerated the process. Currently apart from the US, the UK is also doing QE but the BoE is doing it on a relatively bigger scale than the Fed. The ECB does pretty much the same thing, although they sterilise their purchases.

      If you want a developing country example, in India until the early 1990s, by law all fiscal deficits are financed by the central bank (i.e. printing money). Even today, the RBI part finances the government's borrowing. To put this in perspective, India to my knowledge has NEVER run a budget surplus.

      More to the point, central banks do not have a monopoly on creating money. Under normal circumstances, 95% of money creation actually happens in the banking system. Everytime anybody takes out a loan, new money is created. Everytime you use your credit card, you've created new money. And when you pay it back at the end of the month (hopefully in full), you've destroyed money. It happens every day, every hour, every minute and with no intervention by the authorities.

  23. If my statement meaningless , why do u think the rating agencies downgraded Msia sovereign debt rating to negative ? Is it because we have so much reserves or is it because we have so much more debt which we may not able to pay . And why do u think the msian gov suddenly panic and raise fuel and cigerette tax even before the budget ? Is it also just again meaningless ? Or it's a desperate attempt to stop from further downgrade . Every downgrade will make borrowing cost higher and Msia will forever paying its debt

  24. OS,

    1. Only Fitch downgraded their outlook, not their rating. S&P and Moody's have both kept their outlooks at stable.
    2. Credit ratings tend to be overly biased toward higher income nations. For instance, most developed economies have little to no reserves at all.
    3. Our rating is actually somewhat better than our peers - Indonesia for instance is at BBB, India BBB-. By my estimates, Malaysia is somewhat over-rated anyway - we should be BBB+.
    4. A downgrade would only raise our borrowing costs for foreign denominated debt, of which the government has precious little.
    5. Current debt service as a ratio to opex is so low its embarrasing. Right now its a little over 10%, compared to nearly 20% in the 1990s, and a quarter during the 1980s. An increase in borrowing rates won't be very harmful at all.

  25. I have no time to reply to you. As an economist how can u even compare indo and Msia - both are high on the corruption index, u shld compare against a well manage and uncorrupted nation . and u also concluded credit rating agency biased towards higher income nation - is Msia consider high income ? :) And u also concluded increase in borrowing rate won't be harmful ? Do u as a real economist know the last major crisis we have - the Asian financial crisis the interest rate spike up tremendously triggering property and equity market to crash . Just because now u live in low interest rate environment doesn't mean this will stay . Ask ur leader mr najib if u dont know .

    1. OS,

      The more you write, the more you amaze me.

      1. I put together Indonesia, India and Malaysia, because the market selldown of emerging market currencies lumped these three economies together. The comparison is natural given the circumstances.

      2. The bias in sovereign credit ratings is hardly a unique discovery on my part. Read any critique or research into credit rating agencies and you will find the same. My own estimation is based on a panel regression with fixed country effects, matching economic variables with the historical published ratings of Fitch and Moody's, which is pretty standard economic methodology for assessing ratings consistency. Malaysia as an upper middle income country would generally by slightly over-rated. As you go from higher income to lower income per capita, the ratings go from highly over-rated to highly under-rated. I don't see any inconsistency in what I wrote.

      3. As a real economist, and one who actually lived and worked through the AFC, I know enough to distinguish between cause and effect. The interest rate spike in the latter half of 1997 was an unsuccessful policy move intended to defend a soft-pegged currency that the forex market considered over-valued, a policy that was later reversed with the institution of capital controls (a combination of situations which nicely illustrates the policy choices I outlined in point 4 in my comment below Sharif's).

      The AFC as a whole (for Malaysia at least) was a result of multiple policy mistakes compounded over half a decade. I hold both Mahathir, Anwar, and Ahmad Don equally culpable in creating the condtions that prompted the speculative attacks on the Ringgit. It was the equivalent of a one-way, can't-miss bet - property and equity market bubbles driven by crazy high credit growth, loose monetary policy made worse by non-sterilisation of forex inflows, over-investment in infrastructure, and an overvalued exchange rate. Blaming speculators was a smokescreen - you can't blame sharks for coming when they scent blood.

      The problem I have with this blog post is that it proposes that Malaysia retrace the very same policy missteps that led to the AFC. While I have breath, that's not going to happen.

      4. Najib is not my friend. I neither support BN nor PR, because neither are really addressing the structural policy needs of the country. Just because I don't buy in to opposition propaganda doesn't make me a government stooge. Economic policy should be based on evidence and informed by theory, not on populist suppositions with no basis in reality.

  26. U need to ask najib. As I recall he promised this year no increase in petrol but after 1 rating agency downgraded Msia , petrol increase as a desperate measure to reign in debt . Even ppl in umno is complaining as they always say "janji ditepati " propaganda is always heard but in fact it's "janji kosong". And i wonder now can they can still go face their constituents and rakyat ? No shame ? :)

    1. OS,

      Since I personally support abolishment of all energy subsidies - in fact, due to negative externalities, I believe petrol use should be heavily taxed - I have no problems with the cut in fuel subsidies. I only wish it had been sooner. My reasons have little to do with politics - most fuel subsidies goes to higher income households, which exacerbates income and wealth inequality. A recent IMF study showed high income families gain ten times more from energy subsidies than the poor. Inequality is probably the defining problem of our times, and both BN and PR are taking baby steps in addressing this. Energy subsidies also contribute to pollution, health problems and lost productivity from traffic congestion. Neither petrol, nor diesel, nor gas should be subsidised at all.

    2. 1) A good gov shld look at ways to reduce its own wastage and expenditure first before taxing the ppl and also reducing subsidy .
      2)might as well u compare Msia against Vietnam or Cambodia - then we become champion
      3)a reduction in subsidy is ok if a high income economy can be created . If income doesn't grow as fast as inflation then the ppl here will feel the burden . The ministers have subsidy and allowance - they won't understand normal ppl problem
      4) what makes u think with the reduced in subsidy - will translate into reduced debt ? the amount may be channel to more wasteful mega projects
      5)if as a real economist just now u said increase in interest rate won't be harmful at all. Now u say it is harmful such as the time it happen in AFC . every student who took economics 101 knows increase in Interest rate is harmful not just to the economy but also will trigger widespread default and failure in the banking system . Asset bubble will also burst.

    3. OS,

      I though you didn;t have time for me.

      1. I consider government waste a separate issue.

      2. You complain when I compare with the US, you complain when I compare with India and Indonesia. I even gave debt levels for countries around our level of income - want the ratings for them, too?

      3. I estimated we would hit the high income threshold by 2018, before the government came out with the ETP. Not that it matters - a high income economy is also always a high cost economy. BTW, household income growth over the past three years has been around 7%.

      4. I don['t consider subsidy reduction as really relevant to the debt situation. It is worth doing for its own sake. In any case, subsidies are not carried on the development budget (which is funded by borrowing) but on the opex budget (which is funded by taxes and oil & gas income).

      5. It's a matter of degree. A rating downgrade might raise our borrowing costs by about 25-50bp. In any given year, the government borrows an extra 10% and rolls over about 10% of its existing debt, which means higher interest costs will only come into play over a a 5-10 year period. During the AFC, BNM more than doubled interest rates from under 7% to a peak of over 18% in a few short months. That's a rather big difference, yes?

    4. I support abolishing subsidies; the money can be better spent of developing infrastructure for the country. But on the contrary year in year out, Auditor General points out so rampant wastage. Dont you think the wasted money should also be spent on infrastructure that will benefit the country in the long run instead of going to the pocket of cronies?

      "household income growth over the past three years has been around 7%". This is national average, increasingly the rich are getting richer ( i dont have statistical evidence to support this). Lets take a sample, a fresh grad starting work with a bank 10 years ago get RM2000, now RM2500. This average to only 2.2% a year! Much less than the rising cost of living in Kuala Lumpur.

    5. Minoru,

      We already have a development budget, I'd rather they just saved any money from reducing wastages. On subsidies though, I would redirect some towards social welfare payments. As you say, many families can barely afford to keep up. The problem is less about growth, than the fact that many don't earn very much at all.

      On the inequality gap, it's actually narrowing (except for some reason, Indian households), but very, very slowly. There are measures we can take to address this, but so far not much political support. PR has finally done something after a bit of prodding - they put themselves behind introducing a capital gains tax in the latest Alternative budget. Let's see if that gains any traction.

  27. I came across this by accident today:

    The current min-max price difference in the Euro zone is over 1.4 Euros, or a more than a third price difference across countries. If you assume that the Big Mac index actually accurately describes currency misalignments, the Greek and Estonian "Euro" are seriously undervalued, while the Finnish and French "Euro" are overvalued.

    But that of course makes zero sense, because we're talking about the same Euro.