Friday 3 January 2014

Unfair pains and unequal gains

This year will be about the rising cost of living.

Whether it is the price of petrol, sugar and electricity, toll rates, property taxes or the implementation of the Goods and Services Tax in 2015, they will be catalysts for a general rise in prices.

Higher prices have a compounding and escalating effect. The higher cost of one item can lead to an increase in the prices of many other items. Employees will then demand higher wages, thus further escalating costs.

The fact that people believe their costs or prices will rise is sufficient to prompt sellers or suppliers to demand higher prices. Economists term this as rational expectations.

Where this spiral will lead to is anybody’s guess at the moment.

Personally, I believe the effects could be a lot worse than just a higher cost of living.
As costs escalate, it will impact the country’s exports, current account, national reserves, interest rates, exchange rates, employment, equity and bond prices, and consumption — literally, the entire economy.

Already, people are unhappy, and this has led to protests. Almost inevitably, the pain will intensify and protests will grow. Where will this lead to? Why are the people so unhappy? Can they not understand that the country has limited resources? Is there a way out?

Although no one likes to suffer pains or pay more, people do know how to make choices. They are willing to pay for what they want or need. They know they have to pay for electricity if they want to light up their homes. They have to pay for the roads they use and the food they consume.

People understand the need for good governance, prudence and living within their means. They know there are limits to subsidies. They understand the need for financial responsibility.

So, why are they upset?

I think there are at least three reasons.

Firstly, their EXPECTATIONS were dashed.

For many years, they had the impression (indeed, they were often told publicly and at political rallies during elections) that the government was able and willing to help pay their bills (yes, subsidies) in exchange for their votes. It would be reasonable to suggest that some citizens might feel there is a “social” contract on this.

Their disappointment is reinforced by the fact that there is a convergence and sudden increase in the prices of so many items, and all shortly after last year’s general election.

Secondly, they feel the prices they are asked to pay are not FAIR.

In other words, they are not getting value for their money. We know value and price do not necessarily equate. Are they right? Are they paying too much? A thorough analysis will be helpful. I suspect it is both true and false, with sufficient evidence to support both conclusions. There is no question that our electricity rates are subsidised, for example. But it is also a fact that due to the various monopolies in the economy, many of our costs are excessive. The construction cost of our roads, for example, is high by international standards.

Many of our goods and services are monopolised to serve the interests of a few members of the elite. The people, by and large, have no say in who and how these contracts are given. Yet, the burden of subsidising this elite group of businessmen falls on the people.

Thirdly, it is about EQUITY.

Is the pain fairly shared? The hardcore poor are assisted and the rich can afford the higher prices, but is the urban middle class forced to carry the bulk of the burden?

Businessmen have exemptions to capital gains, tax deductions on all sorts of expenses and makes foreign exchange income.

On the flip side, urban fixed wage earners are pushed against the wall, with rising costs, a falling ringgit and skyrocketing property prices. They are also forced to provide private education for their children despite having little avenue to earn extra income.

This feeling is further compounded by perception.

They read about multi-billion-ringgit projects, multi-million-dollar homes in the US and London, private jets and luxury yachts. Some of these are paid for by the very government that is telling the people that they have to tighten their belts.

Meanwhile, Kuala Lumpur City Hall is proposing to spend 27% more than last year. And the people are asked to pay up through higher assessment tax. They are told it is good for them because it reflects the appreciation of their property values. This irony is not missed by many people.   

The people are also told they must pay more to ensure the government’s financial wellbeing and maintain the country’s credit ratings.  

But for that message to be effective and accepted, the preachers need to explain how they are also contributing EQUALLY to the cause. Leadership is also about humble servitude, and words without actions are hypocritical.

Besides the daunting task of making sure that price increases do not spiral out of control, I believe we need an honest and credible response to the question of whether the pain we are going through will be shared fairly by those who lead and those who are led before we start the journey of healing.

Our divided nation must heal to move forward.

We must find ways to get out of the middle-income trap and the declining standard of our education as well as reverse the brain drain. We need to build a middle ground where we can talk about sustainable fiscal policies, about rolling back subsidies and making our economy more inclusive and efficient.  

And we need to share any pain or gain fairly.


  1. Meritocracy and liberalism (as in individual freedom and opportunity) will be good starters.

  2. The increase in "COST" may not be such a bad thing afterall, as long as "everything" gets the increase, including the middle-income group's income.

    Consumers are complaining that chinese new year goods imported from china are very expensive, and the traders explained that it is mainly due to our weakening exchange rate. Well, to counter that, there are 2 ways; (1) strengthen RM (2) increase the amount of RM a person earns each month...:)

  3. Price escalation is everywhere, from hawker's stall to Cafe, from groceries to supermarket. You can forget about saving for retirement. If you don't have the 15% income surplus, be prepared for a downgrade in lifestyle. Having the option to downgrade is already a blessing in disguise. For those who live from hand to mouth, it will be tough to get by without proper meals.