The right policy mix can help Malaysians make ends meet

For economists who study Malaysia, one of the most striking aspects they notice is the disconnect between two perspectives. On the surface, this country is by all means, an impressive economic story with high rates of growth, rapid poverty reduction, low and stable inflation and is on the cusp of achieving high-income status. On the other hand, there are persistent and growing concerns about the quality of growth and its inclusiveness.

Nowhere is this debate more apparent than when the low rate of consumer price inflation—currently running at just 1.1% in October 2019—is contrasted against the fact that so many Malaysians are worried about the cost of living. The latest edition of the Malaysia Economic Monitor investigates this matter. 

Closer analysis shows that despite low and stable inflation in recent years, different households live with different rates of inflation. For example, those with lower incomes spend a higher share of their family budget on food, and so will experience a higher rate of inflation when food prices rise faster than prices of other items. 

Second, the consumer price index (CPI) doesn’t include costs that have a high investment component, such as the cost of buying a home. Property prices have risen rapidly in Malaysia during the last few years, which isn’t captured in the CPI. Thirdly, living costs vary quite dramatically across Malaysia. It is not unusual for an item to cost almost twice as much in one state as in another. And, while wages in urban areas are generally higher compared to rural areas, these differences are usually not enough to fully offset the higher costs that urban residents face. People are also subject to various memory biases. For example, a rise in prices catches our attention more than stable or declining prices. And we notice price changes for frequent out-of-pocket purchases more than the goods and services that we buy less often.

In fact, the “cost of living” is most likely a catch-all term that reflects a host of issues that affect the budgets and well-being of families across Malaysia. We find that a key driver of this concern is the relatively slow wage growth, particularly the young, and those who lack the necessary education and skills to thrive in today’s changing economy. Heavy household debt burdens and the need to put aside a significant share of income for vehicle loans, student loans or mortgage payments further squeezes income. And there is a shortage of housing that is affordable to low- and middle-income households. With these factors combined, it’s no surprise that a large share of Malaysians feel that they are falling behind.

It is important to look beyond the symptoms to treat to underlying problems of Malaysia’s cost of living challenge. In the report, we identify a mix of short-term measures that could help to alleviate hardships among low- and middle-income households, as well as important structural reforms that will take more time, but will address the root causes that make it hard for so many Malaysians to make ends meet. 

Towards this end, continued reevaluation of price controls is essential to identify and resolve the underlying causes of undue price increases for selected commodities. For commodities with sharp price increases, a focus on market competition and curbing monopoly power is appropriate. In addition, price controls should be aligned with the consumption patterns of low-income households. 

Easing the income shortfalls among low- and middle-income households could entail deepening existing social safety nets. Replacing fuel subsidies with a transportation allowance that is income-targeted but does not require ownership of a motor vehicle would help. Sustainable household income growth needs to be grounded in accelerating labor productivity, and in realigning investment and hiring incentives – a reform area that should be addressed in the longer term.

An important first step to improving financial well-being is to raise awareness regarding prudent personal and household financial management, and provide lower-income households and young adults with access to tolls and advice on how to make sound financial decisions. In the longer term, such efforts would need to be complemented by measures to strengthen consumer protection and encourage more responsible behavior by financial institutions.

Policies to address the shortage of affordable housing could be improved through a sharper focus on principal residences for low- and middle-income households, better affordability measurement and evidence-based housing supply data and analytics. With that in place, housing policies, shaped over a longer period, could prioritize increasing the supply of affordable housing for low- and middle-income households through new construction and rehabilitation of existing units. Stronger coordination among various public and private stakeholders is also needed to ensure an adequate supply of affordable housing.  

None of this will be easy, but with the right combination of policies, it is possible to address the deep causes that make so many Malaysians concerned about the cost of living.

A version of this article was published in The Star.