“Drawing on my extensive experience in economic analysis, I find it unrealistic for the minister, who is presumed to be knowledgeable, to expect the public to monitor the decreasing costs of raw materials and boycott restaurants and food establishments that impose higher prices”
A few weeks ago, Economy Minister Rafizi Ramli lambasted restaurants for not reducing prices despite declining raw material prices.
Restaurant operators responded by saying their operations were burdened with higher costs such as increasing wages and electricity bills.
It is not just costlier raw materials that they have to contend with. Hence, they are unable to bring down their prices.
Ironically, both the minister and restaurant owners are right. Their divergent views are due to a persistent problem that Malaysia faces, which is the middle-income trap.
Some 80 per cent of households are in the low and medium-income categories. The average household manages to make ends meet with the help of a generous subsidy system where most essentials and utilities are priced lower than the market rate.
The result is that Malaysian consumers are not used to seeing price hikes.
And when it happens, the complaints are loud and so, politicians become sensitive.
The biggest rise in prices for the month of December came from beverages, hotels and restaurants. The monthly inflation rate, which had been falling since August last year, inched a little higher in that month.
Generally, it happened because of the festivities that went on until end January.
Drawing on my extensive experience in economic analysis, I find it unrealistic for the minister, who is presumed to be knowledgeable, to expect the public to monitor the decreasing costs of raw materials and boycott restaurants and food establishments that impose higher prices.
How many customers would go up to the restaurant manager and demand an explanation for why the price of a meal is so high, especially after having finished a sumptuous lunch or dinner?
Hardly any! What most people would do is to keep the expensive bill in mind and stay away from the restaurant for some time.
Moreover, nobody is forcing them to frequent restaurants that supposedly make excessive profits. Visiting a restaurant of their choice and having a meal they can afford is all up to the individual.
Close scrutiny will reveal that it all boils down to the basic economics of supply-demand. If there is a demand for dining out, especially during the festive seasons, prices in restaurants will not come down.
But there are times during the low season when restaurants offer discounts, especially during lunchtime. During the low season, restaurant owners settle for lower margins because they cannot escape their fixed overheads such as wages and rental.
The real issue that Malaysia faces is a low wage and low productivity structure. It is facilitated by a system that is heavily subsidised across the board.
The factory assembly line workers can put in more than eight hours a day but the wages are not going to make much difference to his or her life at the end of the month.
The waiter in a restaurant may have handled more than his or her share of tables for the day, but his or her wages are not going to go up very much either.
They need the subsidies to live comfortably. But the same privilege is not needed by someone who works in a high paying job and can afford a luxurious car and house.
Since 2005, governments have been talking about targeted subsidies to reduce their operating expenditure. But implementation has been held back due to numerous reasons.
Governments have been talking about opening up the economy to create higher-value jobs, but it never happens.
From manufacturing to financial services, every industry has its controls to protect local interests.
A targeted subsidy system would force a larger section of society to live in an environment that is driven by supply and demand. It should prompt an increase in productivity and force a faster opening up of the Malaysian markets.
A developing nation such as Malaysia, where almost everything is politicised, cannot have both a low-price environment and rising wages. When wages increase, prices will also increase because supply is controlled.
The supply of basic commodities from rice to sugar and poultry products is all controlled. The Approved Permit (AP) system makes it difficult for market economics to kick in.
The system has been entrenched for years and is difficult to fix overnight. For instance, when prices are high, the solution is to open up the sources of supply. But in the case of Malaysia, even the import of eggs is controlled and can be politicised.
Today, ordinary households tend to take it for granted that the government will always keep giving handouts in difficult periods. This is the reason why even those who were not impacted financially during the Covid-19 pandemic seized the opportunity to withdraw their savings from the Employees Provident Fund (EPF).
Some 6.67 million contributors, or just above half of members below the age of 55, have less than RM10,000 in their account. In five years, the oldest of this group will retire.
Chances are, they would not have the RM240,000 in savings that the EPF recommends a member should have when they retire to get a return equivalent to poverty-level pension. And the bulk of those who have less than RM10,000 in their account are bumiputera workers.
The government would be forced to do something to handle this problem or face a possible political backlash.
One way out for those who have depleted their EPF savings is to enable them to earn higher wages. But having higher wages would result in higher living costs, hence making redundant efforts by the government to keep prices of goods and services generally low through price-control mechanisms and subsidies.
As Rafizi correctly pointed out, efforts by the government to impose price control and subsidies to contain inflation would not work if people are not sensitive to prices.
Instead of using price controls and subsidies, it is better for the government to liberalise the market economy. The liberalisation should be across the board, from manufacturing to financial services.
