The Right Policy Mix Can Help Malaysians Make Ends Meet

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One of the most striking things for economists who study Malaysia is the disconnect between what on the surface is by all means an impressive economic story with high rates of growth, rapid poverty reduction, low and stable inflation and a country on the cusp of achieving high-income status
This narrative exists alongside 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 World Bank Malaysia Economic Monitor launched last week, 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 frequently not enough to fully offset the higher costs that urban residents face. People are also subject to various memory biases
For example, price rises catch 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
Beyond prices, 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 labour 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 behaviour 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 prioritise 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
Richard Record is lead economist for the World Bank in Malaysia. - FMT

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