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.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malaysian Insider on March 23 2012.

6 Responses to “[2526] Improve real wages by liberalizing the auto industry”

  1. on 26 Mar 2012 at 09:06 Bobby

    Can carry on dreaming.
    Liberalisation will not happen as long as MM is alive.
    It will spell the doom of Proton, his precious baby that forces Malaysians to contend with lower quality cars.

  2. on 28 Mar 2012 at 22:03 hamzah

    Mr. Hafiz,

    I had a tought of this since I was in a student. First it look like straight forward, we can just make current average car price to be let say a third of its current price so we can instant increase in disposable income for all families. But I see it like this: We Malaysian are used to higher price of car. If we see sudden decrease in the price, I believe car sales will jump 2-3x. Impact would be: 1) More traffic jam 2) Gov Subsidy for petrol jump 3) Parking Problem.

    A fresh graduate instead of buying Persona for RM20K will buy i.e a BMW for RM85K.. so still may not solved the problem.

    This does not includes the impact of 2nd hand dealer, loss by those purchased thier car at higher price before(because sudden jump on the current car owned), Profit to the Banks drops etc.

    I see it as a mistake, but to reverse the situation is like too dangerous and can be harmful. I dont even think Pakatan Rakyat can solve this if the become the Federal Gov. I way to make it smoother maybe, put shorter maximum tenor for HP, let say 3years and reduced the subsidy for petrol. Still, I believe it is dangerous.

  3. on 31 Mar 2012 at 16:03 Hafiz Noor Shams

    Relying on “we’re used to the status quo” simply says there should be no improvement in the society. While not all changes are favorable, good ones should be fought because “we’re used to it”. It’s an utterly defeatist argument because the current policy is inefficient for the long run. Short term comfort shouldn’t be the reason for long term prosperity.

    And it’s a fallacy to think the policy in isolation. There are other policies that can be done as a suite.

    1) On traffic – then perhaps there wouldn’t be pressure to decrease road toll at the expense of public coffer. Furthermore, there will likely be a switch from Proton/Myvi to other cars instead of an outright increase in cars on the road. Most taxes/duties are levied on foreign cars.

    2) Subsidy – an efficient policy is taxation of petrol, not subsidy. Subsidy should be abolished. In fact, the abolition of subsidy and the removal of pressure to reduce/abolish road toll are factors that can counteract your concern.

    3)Parking – See (1) on toll roads and also Singapore. See (2) for tax on fuel. And three, with the development of public transport, this would be less of a problem. The old automotive policy has always been the development of national cars at the expense of public transportation. Once the mass transit system on, there would be less requirement for cars into the city for commuting purpose.

    And the welfare of the second hand dealers is an inferior concern to the welfare of all. The welfare of the whole country should not be held at random by the second hand dealers, which by the way does not form a significant portion of the larger economy. So too to the bank (never mind that the banks can take the dip)

  4. [...] advocate the abolition, or at least a significant reduction of taxes and import duties on cars as well as the abolition of the approved permits system that blow up the prices of [...]

  5. [...] prices down across the board. This may be true and I have alluded to this in an article I wrote for The Malaysian Insider earlier. In turn, this may increase vehicles on the road as more are able to purchase cars. Or it [...]

  6. [...] the new competitive environment may push prices down across the board. You can read one article in The Malaysian Insider . In turn, this may increase vehicles on the road as more are able to purchase cars. Or it may [...]

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