Sunday, October 24, 2010

Economics @ Home © Volume 2 Issue 22

Troubled times - 100-storey style

These are troubled times indeed. With the launch of the 2011 Budget, how can a self-respecting newsletter proclaiming to discuss economics not talk about it?

By now, most of us would have read and heard and discussed and bitched about how the government is wasting the people's money in trying to build a new 100-storey mega tower. The government has subsequently rebutted by saying that the money used will not be the people's money, but belongs to PNB. So, this week's issue will avoid repeating the gory and now already boring details about the 100-storey building.

Econ @ Home will take a look at what the 2011 Budget means for regular Malaysians at home. After all, that is what the newsletter is for. Bringing down economics at the macro level to the micro folk at home. Making common sense, common.

For starters, bear with me for elaborating a little bit more about the Warisan Merdeka mega tower. Most people who bitch about this issue claim that the money is being wasted on a useless mega-tower and have recommended using the money in places like health, education, security and what not. Everyone wants a little piece of this hot pie. But what the country needs is not spending in these areas. haven't you all learnt your lessons? The government can spend money in these areas. We have seen the likes of RM48,000 laptops, and the like. The trouble with the Malaysian economy is in its policies. Where the money is spent is just secondary.

Now that that part is settled, what does the 2011 Budget mean for folks at home like us, the common folk that try to earn an honest living to spend on the needs and wants of our lives?

First of all, the lack of any initiative to reform the policies bodes huge ills for the nation. The ETP is a huge disaster compared to the NEM that was launched in March this year. Econ @ Home is not anti-government. But Econ @ Home is anti-stupidity. With such a well-written plan like the NEM available, it requires almost no intelligence to go along such plans. How can improving productivity and competitiveness be so bad?

How can Malaysia and Malaysians keep denying to themselves that nothing is wrong with our policies? The government's current stance is, "Don't worry, this time, business is not as usual. That's because the private sector will be the one spending the money." Why have they not realized that it does not matter who is the one spending the money. My favorite simile for such a situation is, "Be it the government or the private sector that adopts the white elephants, they will still be white elephants". The joke of the whole situation is, the government is telling the private sector where to spend their money. This is made worse when our infamous bankruptcy prophet, Idris Jala says that, "If the projects fail, it will be the private sector's fault". I do not need to elaborate further the irony of the issue.

Second, what do minimum wages mean for us? Sadly, on the surface, to most of us, it means nothing. This is because Malaysia as a whole, is being squeezed in the middle income trap. But is it true that it does not affect us? Let me just touch on why minimum wages are bad in an unproductive and uncompetitive country like Malaysia. Mind you, this is just simple economic theory that anyone who studied Economics at the pre-university level can tell you (Hmmm... I think I need to qualify what pre-university means because Matriculation is a lazy student's excuse of a pre-university education). You may ask, "How can minimum wages be bad?" It raises the wages of the poor, and subsequently, their standard of living.

Ordinarily, this would be a good idea if the country was a productive one like Germany or China. But mentioning Malaysia along the names of those industrious countries is like blasphemy. When you impose minimum wages, you will immediately raise the costs of hiring for companies. While local companies have no choice by to absorb these costs, MNCs do not have to deal with this. All they have to do is set up a new factory in Vietnam and voila, they would have cut their wage expenditure by 75%. Can we afford to lose the few meager FDI that still remain within the country?

What does this mean for local companies? Since they can't really move out of the country at their whim, they have 2 options. First, cut expenditure elsewhere. They may have to cut expenditure on advertising, research and development, and even training budgets. Cutting advertising will ultimately lower sales, and reducing expenditure on research and training simply means the firms have no hope of moving up the value chain. Lower resources also mean that firms are unable to bid for the talent that they seek. How are we going to achieve competitiveness? Their second option is to pass the cost of hiring to the consumers. Now, guess who the biggest group of consumers are? If you guessed the middle class, then you are most likely to be correct. It is us, the hardworking people who struggle to make an honest living who have to bear the burden of higher prices because of increased costs. Since the middle class does not fall into the levels of minimum wages, it does not help them at all. So how can the middle class cope with increased costs of living? Simple, by demanding higher wages. Now, I hope you can see where this is going. In economic theory, this is called the wage-price spiral. Higher prices drive wages higher. Then higher wages will drive prices higher.

Now, the issue on services tax. What does the increase of 5% to 6% mean for us and for the government? Well, needless to say, the majority of our expenditure will be consuming services. Let's say that 70% of our expenditure is on paying for services. That would entail a raise of 0.7% in our typical expenditure pattern. That is by all means palatable. What does this mean for the government? If you look at the economic report downloadable from the Ministry of Finance's website, you will notice that revenue from services tax will increase ONLY from 2.4% to 2.5% of revenue. That is a 0.1 percentage point increase in revenue. One can only wonder, what is the rationale for this? If the government wishes to raise funds to fund their mega projects, why not just rationalize the subsidies or trim down the bulging civil service. Can you imagine that 28% of the government's money is spent on paying civil servants in emoluments? Of the total labour force, only about 10% are from the civil service. What this means is that, 28% of the government's money is spent ONLY on paying 10% of the hardworking people of Malaysia. This is not even counting the pensions and gratuities and whatever other benefits the civil servants have.

I hope that these 3 issues will open your eyes further on how the 2011 Budget affects the typical Malaysian at home. I tried not to dwell too much on the 100-storey tower simply because all of you have already over-discussed it. By the way, as a trivia, as at time of completion of this article, there are 144,004 supporters on the "1M Malaysians Reject 100-storey Mega Tower" page.

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