March 25th, 2012 by Hafiz Noor Shams
The articulation of concern for stagnating wages is well-rehearsed among Malaysians who are just entering the labor force as well as those earning low wages. For most fresh graduates especially, life in the city would be far more painful than it is without the support of their parents.
Regardless of justification, many have complained about rising prices and their disappointing wage levels and growth. While from a strict economic perspective it is arguable that the complaints about inflation are largely exaggerated, based on cherry-picking reasoning and frequently are based on conceptual misunderstanding of inflation, real wages is still an issue. The issue is that it has not been growing as fast as many would like it to, nor do they match their qualifications and capability. The brain-drain phenomenon is partly caused by the concern for wages as well.
PEMANDU targets to double the per capita income of Malaysians in a certain timeframe. Notwithstanding the argument that the target will be achieved even without PEMANDU and that the doubling of income per capita is really more inflationary than real, the target and the relevant plans highlight how wage growth is a pillar of the Najib administration’s policy.
What truly matters is real income. The series of criticism and counter-criticism between REFSA and PEMANDU at least suggests that beyond technicalities that will get policy wonks excited, hostile political maneuvering and a superficial public relations exercise, both organizations are concerned with real income. That is good. That means the mainstream debate is on the right track and the competitive public political sphere to some extent is working.
But even taking the target by PEMANDU in good faith, the plan is overly intricate. For a grand plan that is supposed to be driven by the private sector, it should not be too complicated. If it were privately driven, then the planning should be left to the market’s thousands of private planners working in the go-go economic center that is Kuala Lumpur, not left to central planners working in government complexes in the desolated, isolated and pretentious Putrajaya.
Granted, the PEMANDU plans are a set of national economic policies. Some complexity is inevitable but the truth is that this is a government-driven plan. And it overlooks simple and quick market-based solutions.
One of those policies is the liberalization of the automotive industry.
Prices of cars are amazingly high in Malaysia. This reality is amazing given that fact that cars are easily tradable and Malaysia has one of the most open and trade-dependent economies in the world. The characteristic of tradability and open market should make motor vehicles reasonably affordable. Yet, most cars in Malaysia are overly expensive in general. It takes so much out of a person’s income to own what is a considered a necessity.
The reason for this is protectionism. The industry suffers from punitive taxes and duties all aimed at giving domestic car producers a leg up. Competitive pressure is prevented from pushing prices of both local and foreign cars down to more reasonable and affordable levels. The same competitive pressure has the potential of pushing the prices of even the cheapest cars in Malaysia down.
While this particular liberalization policy does not increase wages, it does improve real wages significantly because the servicing of a car loan can be a major household expenditure. With less restrictive taxes and duties, this particular chunk of household expenditure will decrease, hence improving the household’s real income. More importantly, instead of dedicating a large fraction of income to servicing car loans, newly freed income can be used to purchase other goods, services or simply saved. To put it simply, they can do more with less.
The attractiveness of the liberalization is not just about improved real income. It is also about improving real income almost immediately. Contrast this to the intricate plan to double the headline wages of Malaysians by year 2020 by propping up small inefficient sundry shops when large retailers can do the job much better due to their economies of scale. This begs the question, why should Malaysia do this the hard, expensive, incentive-twisting way when there are quicker, simpler and more organic solutions?
There are other considerations of course, like the fate of those employed in that particular inefficient local industry.
It is true that there will always be winners and losers but the comeback point is that there will be more winners than losers: the losers are concentrated in a particular industry which is small relative to the whole economy to start with, and the winners are widely dispersed throughout the economy on a much larger scale. On top of that, the newly unused income will create new permanent demand that will likely be able to absorb the temporary disruption in the labor market and redirect resources, both labor and capital, to better use, all without too much overbearing government intervention.