Inflation and the pressures of policy formulation

 

The inflation rate was at 2.8% in May, and it averaged 2.4% for the first five months of the year.

By themselves, these numbers are harmless. A rate of inflation that is close to 2% would be as desirable as one would like it to be.

In comparison to the rates of inflation in some other parts of the world the numbers in Malaysia are sedate. The US reported an inflation rate of 8.6% for May; in the UK it was 9.1% and Indonesia’s inflation rate dashed to 4.4% in June.

Why the furore about the rate of inflation in Malaysia? The inflation rate could be low, if it is slightly above 2%, and we could be complaining about nothing.

However, it is more likely that there are methodological issues and the published rate does not reflect the felt experiences of the public.

This could be a consequence of the manner in which items were selected, the large number of controlled items in the basket that are used in the construction of the index, or perhaps only items with specific characteristics enter the basket and not everything that we commonly imagine to fall under the category.

What matters ultimately is that the situation is serious enough to get university student union representatives ready to protest. Opposition party leaders may want to agitate since this is an issue that can be capitalised upon.

The government’s uncertainty of policy has not given clear direction on how it plans to address the issue. In fact, it has succumbed to policy turnarounds.

The increase in the price of chicken serves as a good example to illustrate some of the issues at stake.

It was decided at one stage to ban the export of chicken. That was not a very clever idea. Another solution suggested was to get the GLCs to intervene in poultry supply and to untangle the knots that interfered with the supply of chicken.

It is not clear how far this proposal has progressed and how it will be done.

It was then decided that the ceiling price for chicken would be withdrawn – a fairly disastrous measure given the deeply entrenched culture of subsidy dependence. This decision was reversed to raise the ceiling price to RM9.40 per kg. It is estimated that the market price for chicken would otherwise be RM13 per kg.

In yet another move, the chicken suppliers who would have liked to be subsidised have been told that they will not enjoy such a favour.

Do these initiatives suggest lessons for students of the policy process?

The decision to let market forces work out the price was wise. But good policies can be marred by bad timing, reducing good policies to unsatisfactory ones.

Removing a price ceiling reduces market distortion, however it cannot be done at a time when people are economically distressed and emotions are running high.

Second, policy has to be anchored at the micro level. It is not enough to talk in broad terms; it is necessary to have an intimate understanding of the industry at the firm level.

In the absence of such knowledge, one would be tempted to offer solutions that, although acceptable from a theoretical point of view, would not work in practice.

It is only if one had such exposure that one might know that certification requirements could be a bottleneck. Or that removing the middleman (at this point) would only worsen the problem. And so on and so forth.

Considerations of the political economy are important. That includes knowledge of the social consequences of any policy choice.

It is not useful to have the best policy (from a textbook point of view) if it would result in social unrest.

Sometimes it is best to accept that the third-best solution is the best solution. By this it is meant that policymakers must be realistic about what can be done, and what cannot be done.

It has to be accepted that inflationary pressures are here to stay for a bit. As long as the downside risks and problems persist, we cannot expect to have the set of prices that existed in 2018.

In the final analysis two things should be done. Seek ways to relax supply constraints. Manage expectations. And the latter includes good communication with, and buy-in from, the public.

Finally, policymakers should realise that sometimes economists are not the best people to talk to. What this means is that you should talk to them along with others who know the industry and the market.

The policy solutions that were suggested seem to hint of great attention at the aggregate level and not enough at the granular level.

Malaysia is not alone in facing the phenomenon of rising prices. In France, for instance, this is resulting in some signs of social unrest.

It is comforting to note that the government is serious in its intent to combat inflation. It is not for nothing that we have called for a war against inflation. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.