Friday, November 5, 2010

HIGH INCOME ECONOMY


As posted by Dr. Mahathir Mohamad at Che Det on October 26, 2010 2:25 PM

1. The Prime Minister has announced that Malaysia should develop into a high income economy. In the past we had stressed low cost because we wanted to attract Foreign Direct Investment through low wages for our workers. That was a good strategy because we were trying to solve our high unemployment problem.

2. We were so successful in creating jobs that we have to import foreign labour. We were effectively helping to solve the unemployment problem of other countries.

3. Our cost of labour is now higher than our neighbours and of course against China and Vietnam.There is no way we can compete with them. If our labour cost increases further, especially if we want to have a high income economy, we can no longer compete for FDI, at least the labour intensive ones.

4. When we increase incomes it will not be only wages and salaries which will increase, profits as income must also increase. Government can quite easily pay high salaries and wages. But even for the Government the money must come from somehwere.

5. Unless Government revenues increase, the money will have to come from reduction in development expenditure. This may not be welcomed by the people.

6. For the private sector the money can come from more efficient management, higher productivity through more efficient output by workers or through investments in better machinery and equipment. Almost invariably the higher wages and salaries will increase cost and therefore the prices of goods and services.

7. Higher income will therefore result in higher cost of living. This will reduce the purchasing power expected of higher incomes. This would be meaningless unless the increase in cost of living will be less than the increase in incomes.

8. Unless the increase in incomes is properly managed, it will not enrich the people in terms of purchasing power. As the cost of living rises, the increases in income may not purchase more than what the previous lower income would. Indeed it may be possible that the increases in income will actually purchase less goods and services than the previous low income.

9. We see today the purchasing power of the developed countries with much higher income than us. The United States is said to have a per capita income of USD36,000, roughly five times Malaysia's USD7,000 per capita. But the people are not five times richer than Malaysians in terms of purchasing power. In fact in certain cases the purchasing power is the same as Malaysians. According to the McDonald's Hamburger Index, the Ringgit is the same as the US Dollar in purchasing McDonald's hamburger - one Ringgit will buy in Malaysia what USD1 will buy in the US.

10. Clearly the increased income in high-cost countries does not give an increase in purchasing power equal to the increase in income as compared to low-cost countries. It is important that the Malaysian public understand this.

11. Malaysians are very sensitive to price increases, in many cases illogically. When crude oil increased in price from USD30 per barrel to USD140, Malaysians expect the pump price of petrol to remain the same. This is illogical. Surely the increase in crude price will be reflected in the retail petrol price.

12. The Government can subsidise. But when Government subsidises it must tap the money from other allocations. Perhaps it can use the extra profits from the sale of Malaysian crude in the market. But this would not be enough as we consume three-fourth of our oil and sell only one quarter. From the sale of one quarter of our oil, we cannot fully subsidise three quarters that we sell at the old price.

13. There must therefore be an increase in the price of retail oil. Malaysians must accept reasonable price increases when incomes and profits are increased on our way to becoming high-cost developed country. There is no way we can continue to enjoy low cost of living while we ensure we earn high incomes.

14. A high-income economy must therefore also be a high-cost (of living) country. But with good management the high incomes would increase our purchasing power to some extent, especially in the purchase of imported goods and services and when traveling abroad. There should be also a certain increase in purchasing power in the country. In effect despite higher cost of living we will still enjoy higher purchasing power and a higher standard of living.

15. I am all for the Government's high income policy. My worry is that the people may expect high income without the accompanying high cost of living. It is better for them to be forewarned.