HIGH INCOME – HIGH COST – ECONOMY? by Ameer Ali Mohamed

Malaysia aims to become a high income economy within the decade, lest she gets caught in the middle-income country trap. While the objective is noble, the policy makers should ensure that the population at large will not be burdened with the ills of a high-income economy.

Prime Minister Dato’ Sri Mohd Najib Tun Abdul Razak made this a key priority under his leadership, in order to make Malaysia a developed nation by 2020, a vision first mooted by the fourth Prime Minister, Tun Dr Mahathir Mohamad.

In his keynote address at the 2009 Invest Malaysia, Najib highlighted efforts to formulate a new economic model that will be based on innovation, creativity and high value. It involves shifting the country’s reliance from a manufacturing base dependent on semi-skilled and low-cost labour to one that centres on high technology and a modern services sector dependent on skilled and highly paid workers.

Certainly when salary scale in Malaysia is raised close to international levels, we will be able to overcome the brain drain issue including attracting Malaysians currently working overseas and contributing to the economic development of other countries.

The main obstacle in such an endeavour would be above-average inflation. Often whenever a salary scale structure is elevated, it is followed by inflationary pressure, like it or not. It did not matter if the upward tweaking was due to rising productivity or worse, adjustments arising from historical inflation.



One may recall in the early 1980s, the starting monthly pay of fresh graduates in the public sector was about RM800 to RM1,000. The price of a new 1.2 litre car then was only about RM10,000. Ten years later, the starting pay for fresh graduates was from RM1,200 to RM1,400 while a new 1.3 litre car would cost RM28,000. Today, fresh graduates get around RM2,200 to RM2,500 per month while a new 1.3 litre car is priced around RM36,000.

Of course, thanks to technological advancements, the cars are far better today, but does that mean we must start comparing them with current 1.0 litre cars or five-year-old 1.3 litre second-hand cars?

Let us now compare the price of a plate of fried rice – RM1.50 in the early 1980s, RM2.50 in the early 1990s and RM4.00 to RM5.00 currently. What about prices or rental rates for basic houses or apartments, or perhaps rental for a room?

Based on official figures on annual inflation from 1980 to 2008 that peaked to 9.7% in 1981 and dipped to the lowest level of 0.3% in 1985, one needs to have RM237 in 2008 to have the same purchasing power of a RM100 note in 1980 on the assumption that his spending pattern is equivalent to the composition of the CPI basket. In other words, a RM100 in 1980 is only equivalent to RM42.13 in 2008 in terms of purchasing power.

Chart 1: Inflation and its impact on the money value


Hence, despite the increase in starting salaries over the last 30 years, the purchasing power has indeed remained at the same levels. Nonetheless, what has happened in the right way is that more jobs and business opportunities were created and more people had the opportunity either to work or do their own businesses.

Two other important issues to consider while we move towards the high-income economy is its impact on the country’s tourism industry, which in turn will also affect its supporting industries, and the trade balance.

Without doubt, one of the attractions of external tourists is the better priced goods and services in Malaysia. A reasonable hotel rate in Singapore may cost SGD250 (or RM600) per night but one will be able to get an equivalent room at half price in Kuala Lumpur. A plate of “lontong” for breakfast in Singapore would cost SGD2.50 (RM6.00) but only RM2.50 in Kuala Lumpur. And the list goes on.

In becoming a high-income economy, these may no longer be the reasons for international tourist arrivals. Our goods and services could become as expensive as in other developed nations due to two major reasons – inflationary pressure that is greater than the already developed countries and strengthening of the local currency. If these factors are not handled, international tourists must be given different reasons to visit Malaysia.

Managing the overall balance may be another issue. From the trade balance perspective, imports of final goods and services for local consumption may increase as (i) they become cheaper in local currency terms and (ii) Malaysians are paid better and therefore can afford them. We must also address productivity growth to at least grow in tandem with the salary increases. Otherwise, our products and services may become less competitive in the global markets.

Secondly, more and more Malaysians could afford to travel overseas for their vacation. While this may affect local tourism, the main issue is the rising outflow of our currencies to finance the rising outflow of Malaysian tourists.

While the efforts to transform Malaysia into a high-income economy should be supported by all citizens at all levels, policy makers and key participants in the economy should ensure that our beloved country will not be subjected to the high-income country trap.

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Article Contributed By Ameer Ali Mohamed. Ameer is Director, Financial Research of NextVIEW. He has a total of 20 years experience as a corporate journalist, investment analyst and fund manager, including as research head of two stockbroking firms and CEO/CIO of a funds management company.

Republished with permission. This article was published in the Just Say It column in Shares Investment (Malaysia edition) August 2009. You can get the latest copy of Shares Investment (Malaysia edition) at leading bookstores in Malaysia.