The quick fix to the cost of living

 

Anwar Ibrahim has put the cost of living at the top of the agenda, so here are some ideas.

First, the cost of living has two elements, prices and incomes. You cannot bring prices down quickly but you can slow the increase. One simple way is to extend the electricity subsidies for a short period beyond December until subsidies are reformed.

This will help to slow inflation, which is already falling but it will not bring down prices so we need to look at incomes. The quickest solution would be a one-off cash aid payment in December for the B40 followed by a universal basic income (UBI) scheme in Budget 2023 next year.

For those who scream national bankruptcy, a one-off cash aid payment in December of RM250 each to those in need would cost 0.05% of the gross domestic product (GDP).

To begin reducing prices the government must quickly start cutting cartel and monopoly licences, ending unnecessary regulations except those on health and safety, removing barriers to competition and imports to increase supply from any source, and promoting price competition.

Price controls and subsidies are short-term and must be reformed.

First, they are very expensive: RM80 billion this year. Second, rich people benefit disproportionately, as in the petrol subsidies. Third, they distort the market.

If prices are kept low, businesses will stop supplying those products and we will see structural supply shortages.

Also, the inflation process has changed. In the last two years, we saw higher prices in oil, utilities and food so the last government had price controls and subsidies in those specific areas.

Now, we see higher prices across most of the consumer price index (CPI) components and the government cannot control or subsidise all of these. They cannot subsidise leisure activities or put a price cap on hotels.

When we have a process of generally rising prices we have a full-blown inflation which is one reason that Bank Negara Malaysia (BNM) has raised interest rates.

Fortunately, global prices are coming down. Oil prices are back to the levels of January 2022, global transport costs are much lower too and food costs are also falling.

The rate of inflation should be lower as a result but the price level of many products will not necessarily fall.

Prices will remain elevated even if they are rising more slowly. We say prices are “downward sticky” which means they are quick to rise when input costs rise but slow to fall when costs fall.

So we need to move from tackling the cost of living through price controls towards making things more affordable through higher incomes.

This can be done through targeted cash transfers like the cash aid scheme but this must be reformed to provide monthly payments as a percentage of income below a certain threshold rather than one-off, lump-sum payments. This is a UBI scheme.

To bring prices down in the long-term we need to encourage competition so that firms compete to capture sales through lower prices.

This should be done at the same time. It involves removing regulations like approved permits (APs), allowing more companies to supply products such as food in short supply, increasing import options, and reducing other costs, such as transportation.

We need full market reforms to remove cartels and monopolies, cut out middlemen, improve competition, and promote small- and medium-enterprises (SMEs) to increase supply options.

So the most feasible immediate option is not bringing down prices but making the cost of living more affordable by raising incomes. In the New Year, a full reform agenda can begin. For now, there is no quick fix to higher prices but there are some quick fixes to the cost of living. - FMT

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