Oleh/By : DATO' SERI DR. MAHATHIR BIN MOHAMAD
Tempat/Venue : PUSAT DAGANGAN DUNIA PUTRA,
KUALA LUMPUR
Tarikh/Date : 07/09/94
Tajuk/Title : MAJLIS MAKAN MALAM INSTITUSI-
INSTITUSI KEWANGAN
Saya mengucapkan terima kasih kepada Persatuan
Bank-Bank Dalam Malaysia kerana menjemput saya dan isteri
ke Majlis Makan Malam Institusi-Institusi Kewangan yang
dihadiri oleh bankers, financiers dan insurers tanahair.
Majlis seperti ini amat berguna untuk merapatkan hubungan
dan kerjasama antara ahli-ahli institusi kewangan negara dan
untuk Kerajaan memberi sedikit `input' dalam industri ini.
2. The current economic expansion which began in 1987 is
now well into its eighth year of growth. Economic activity
is expected to remain strong in the next couple of years,
making this the longest and strongest expansion in over
three and half decades. The latest indicators are that
growth in 1994 and 1995 should be sustained at the eight
percent plus level.
3. While the outlook for the Malaysian economy is up-beat,
there is no room for complacency. We must never ever take
growth for granted. Recession has been experienced by
Malaysia before and it can happen again. And it will happen
sooner if we forget the lessons of the past. Of particular
importance is the challenge to curb inflationary pressures.
4. I know I have been widely quoted to have proposed zero
inflation for Malaysia. To many I must sound rather naive.
The world has come to expect and to accept inflation as a
matter of course. Indeed many countries build into their
costs and prices the inflation factor. Unions demand and
employers agree to fixed increases in wages annually in
order to cope with inflation. At the very least 3-year and
5 - year salary revisions are implemented irrespective of
productivity. They believe that by so doing they neutralise
the effect of inflation. Actually they know they are in fact
contributing towards and ensuring that inflation does take
place. But they cannot use this argument because no one
would accept it. Besides, executives like to go along with
the union demands because they get similar increases in
their salary, usually at a higher percentage. The
proprietors are happy too because they think they will get
bigger profits.
5. It does not take a genius to work out that the increase
in wages and incomes is quite meaningless, because the
prices of everything go up too. The amount of income is
bigger but the purchasing power does not increase. To use a
hackneyed term, you are back to square one.
6. I would like, if I may, to throw to you, the
economists, the financiers and the bureaucrats, some rather
naive theories. It is about not just achieving zero
inflation but actually rolling back prices so as to achieve
minus inflation, or deflation, although the term does not
quite mean reduction in prices, the opposite of inflation.
7. Is this absurd? You must admit that quite by accident
countries have experienced minus inflation. Unfortunately
we notice that the economy was not doing well at the time.
There was in fact zero or minus growth. We immediately
conclude that negative inflation is associated with what we
consider as an unhealthy failure of the economy. So we are
not quite happy with it and we would not like to
artificially induce it.
8. But surely we all know that the amount of money
we earn is meaningless unless we can purchase goods and
services with it. Of what use is an increase in income if
we cannot purchase more of whatever we used to purchase
before? Of what use is it to talk in terms of millions,
billions and trillions if conversions to the U.S. dollar for
example reduce the zeros at the end of the figures to
nothing?
9. Many countries, off and on, knock off the last two or
three zeros, not only because they are cumbersome but they
are quite meaningless. Yet we do not seem to notice that
when they knock off three zeros from a million Turkish
Liras, they are in fact reducing prices and wages by 1,000
times. In other words they have rolled back inflation. No
one was really hurt. The only problem is that inflation
psychology then initiate another round of wage and price
hikes. They then roll back again by issuing new currency.
But the charade continues.
10. Supposing in Malaysia we decide to pay ourselves in
British Pounds or U.S. Dollars instead of Malaysian Ringgit,
then immediately we would be dealing with lesser amounts of
money. But in terms of purchasing power we would not be
worse off. On the other hand if we decide to pay ourselves
in Italian Lira or Japanese Yen we would be rolling in
money, but we would not be any richer either.
11. Clearly, amounts of Pounds, or Dollars or Lira or Yen
are quite meaningless. What is meaningful is what they
purchase. Similarly, amounts of ringgit are not important.
What is important is how much the ringgits can purchase. If
we get a certain amount of goods or services for a lesser
amount of ringgits because our incomes have also been
proportionately reduced, what does it matter to us?
12. I must admit this subject fascinates me. I have gone
through many bouts of inflation and deflation and I find the
phenomenon absolutely ridiculous and unnecessary.
13. As a little boy I remember going to the provision shops
to buy things with only a one cent coin in my pocket. Yet
what I bought would be as much, if not more, than what you
can buy with RM1 today. Was I poor because I had one cent
then? Am I rich because I have RM1 to buy one cent
worth of things?
14. One of the most intriguing phenomena we went through
was the rapid devaluation of the Japanese banana currency.
From using 1/2 cent coins in the immediate pre-invasion
period, we went on to deal in 100 dollar and 1,000 dollar
notes. Towards the end everything was priced in multiples
of 100 dollars. We carried sacks of money but we were not
rich. Indeed, we were rather poor, having to do without
many necessities.
15. Then the British returned and reintroduced the Straits
dollar. Immediately everthing went down in price. I
remember buying pre-invasion Straits dollars in the black
market during the occupation. I paid hundreds of thousands
of dollars of banana notes for $100 Straits. Immediately
after the war I bought a second hand Underwood typewriter
for $40 and began to learn touch typing. I was better off
with my $100 Straits settlement legal tender than many
people with millions of worthless banana dollars.
16. What happened was deflation on a grand scale. Suddenly
prices were 1,000 or more times cheaper. Of course salaries
went down too. When I worked as a temporary clerk in the
office of the Custodian of Enemy Property I was paid $80 per
month. Regular clerks were paid the pre-war salary of $60
per month. I was actually richer than when I was selling
bananas in Pekan Rabu during the Japanese occupation making
tens of thousands of dollars a month.
17. I am not recalling this because of nostalgia.
Somewhere I think there is a lesson for us. And that lesson
is very much concerned with inflation, with the perception
of wealth and poverty.
18. Wealth or poverty is not determined by how much money
you earn but by how much goods and services you can buy with
your money. We have always argued that because the cost of
living in Malaysia is lower, our people are not as poor as
their GDP per capita in U.S. dollar seems to indicate. They
can buy far more in Malaysia with their earnings than the
people in countries with a high cost of living can buy with
the same amount of dollars in their own country. For this
reason we have always opposed attempts by Western trade
unions to force wages in this country to go up.
19. Now of course this fact is acknowledged. Beginning
with the MacDonald Hamburger Index we now have the
Purchasing Power Parity (PPP) as a basis for comparison
between the wealth of nations. According to the PPP, the
U.S. dollar equivalent of our earning is US$8,050 per head
and not US$3,230. We are therefore less far behind the
developed countries than we think. Japan has a per capita
GNP of $37,500, but in PPP terms is only worth $20,160, just
slightly more than twice that of Malaysia. On the other
hand we are not so far ahead of our neighbours where the
cost of living is lower than ours even though their per
capita is lower.
20. We should feel heartened by this. But we should not
congratulate ourselves. The important thing is that the PPP
is a very realistic index. It recognises purchasing power
as more important than the actual amount of money we have.
21. Now the price of goods in terms of currency units is
quite irrelevant. Whether we call it dollar or yen, or
pound or ringgit, whether the units are small or big, all
these are quite irrelevant. What is relevant is what we get
in exchange for the money we pay. If it is possible to pay
less, why should we pay more for the same thing? The
question is how can we pay less without causing someone to
lose money? Surely if we pay less for something that cost
more, people will not be in business for long.
22. But actually it is possible to pay less without
anyone losing money, without putting people out of business,
without bringing on economic ruin in double-quick time.
23. Supposing in Malaysia we decide to reduce the price of
everything by 10 percent, what could be the effect? The
reduction, of course, should not be just in the price of
goods and services only. The wages and taxes should also be
reduced by 10 percent. Indeed, every transaction involving
almost purely domestic items should be reduced by the same
factor. Please note that we are neither revaluing nor
devaluing the ringgit. The exchange rates remain.
24. Everyone would then have 10 percent less money to spend
or save or whatever. But since what he wants to buy will
also be 10 percent lower in price, his reduced income does
not reduce his purchasing power. He will not be any poorer.
He will in fact be as well-off as he used to be in almost
every sense.
25. The seller of goods and services will also not lose as
he pays lower wages and lower prices for all his locally
produced inputs. The investors will not lose either as his
capital cost would be 10 percent cheaper except for imported
inputs.
26. Imported goods will not be reduced in price, of course.
It will remain at the same price as before since the local
currency is assumed to retain its current exchange rate.
27. However, imported inputs in the production of local
products is usually only a small fraction of total cost. So
even where there is imported inputs the 10 percent reduction
in price can be almost achieved.
28. Now the effect of a l0 percent reduction in the price
of all goods and services is to reduce inflation by almost
l0 percent. Since income is also reduced by the same
amount the people will
not really gain greater purchasing power. Purchasing power
would remain as before.
29. The greatest advantage is that goods produced locally
for export will be cheaper, at times 10 percent cheaper.
This will attract both local and foreign investors. Exports
will be more competitive. Industry will grow. Economic
growth would be accelerated. In the end the incomes of
everyone in actual terms and in PPP terms will increase
without affecting costs and stifling economic growth.
30. On the other hand imported consumer and capital goods
will increase slightly in price, relative to earnings and
purchasing power. Fortunately in Malaysia very few
essentials are totally supplied from outside. Even luxury
items are locally produced now. The lowering of taxes by 10
percent would mitigate the relative increase in imported
goods. Only the very rich with a penchant for luxury
imports will have to expand more. Even then not much more.
We tax 300 percent on luxury cars. A reduction of that by
10 percent would certainly be a great help in reducing the
10 percent effective increase in price. Assuming the
imported price is RM100,000. In terms of the purchaser's
earnings it will be 10 percent dearer or notionally RM10,000
more. But a 10 percent reduction in import duty amounts to
RM30,000. The old price was RM400,000 but the new price
will be RM370,000. Still this represents a reduction of 7.5
percent and not 10 percent. I don't think it matters for
someone wanting to buy such a car.
31. The Government has had much experience of the effect of
reducing taxes. In the past taxes were increased or new
taxes created in order to increase Government revenue.
Indeed at one time there was even a tax on crown cork. All
these increases did not yield appreciable increases in
revenues. For some time now we have been reducing all kinds
of taxes. Where once luxury items were heavily taxed on the
principle that they were unnecessary and only the rich
bought them, now we have reduced or removed totally the tax
on them. The result is that no one buys them abroad to
smuggle them in. Instead Malaysia has become a shopping
paradise for such goods. Naturally corporate tax and income
tax on such businesses are collected. This is far more than
the few dollars we collected by way of import duty before.
32. The result of tax holidays for industries and reduction
in income and corporate taxes has also been most gratifying.
Of course the reduction or removal must be judicious or
there will be a reduction in total revenue. It is clear
that reductions in taxes, judiciously determined, will
actually increase the revenue of Government rather than
decrease.
33. A good case study on the probable effect of price,
wages and tax reduction would be Japan. The cost of living
in Japan is the highest in the world. A rock melon sells
for as much as the equivalent of RM300 each. The increase
in the exchange rate of the yen has not helped to reduce
prices even of imported raw materials and goods. The price
of petroleum products has not gone down despite oil prices
going down. If you combine the lower oil price and the rise
of the yen against the U.S. dollar, fuel cost in Japan
should go down to less than 30 percent of the highs when oil
prices were at its peak. But neither the retail price nor
the fuel and energy cost to industries have gone down.
34. Japan's exports now reflect only the rise in the
exchange rate of the yen and not the greatly reduced prices
in yen terms of raw materials which Japan imports for her
industries. Surely even if the benefits of low input costs
due to imports are not fully able to counter the increased
cost due to a strong yen, at least there must be some
tangible reduction. And Japan is one country that imports
almost all the raw materials and fuel for its industries and
domestic consumption. Yet Japanese exports never go down in
price.
35. But what if Japan decides to reduce everything by, say,
50 percent? What if Japan deliberately reduces wages and
taxes and the selling price of melons and all locally-made
goods by 50 percent? The strong yen would already take care
of imported inputs. The price of all products and services
would be halved. Japan would be able to export
competitively again.
36. The people's standard of living would not be affected
in any way because the 50 percent reduced income will buy
all the things they used to buy as all these would also be
half-priced. At one stroke Japan would be able to solve all
its present economic problems, without devaluing the Yen
even by one percent.
37. The Japanese are a highly intelligent and disciplined
people. If anyone can achieve this economic miracle, they
can. But of course they will not. If they do, the other
six will take even more drastic action against them.
38. Still it is an interesting proposition to study. We
can learn much from it. We can understand better the
workings of a national economy. Perhaps we can use some of
this knowledge in the management of our economy and in our
fight against inflation.
39. I hope you who are experts in the fields of economics,
finance and taxation will apply your minds to this study.
With your powerful computers you can simulate, model and
calculate the results of such a move. Certainly we can
study the effect of a 10 percent all round reduction with no
change in the exchange rates. Would we be poorer, richer or
would the status quo be maintained? What would be the cost
of the things we produce for export? Would they be cheaper
and more competitive in the export market? Presently we
earn US$48.46 billion from export. Would these earnings and
profits buy us more things in a Malaysia where everything is
10 percent cheaper? With Malaysian export cheaper by
whatever percentage we chose, not necessarily by 10 percent,
would there be an increase in exports?
40. What about investors, both domestic and foreign? Would
they not be attracted to invest more in a Malaysia where
their local costs would be 10 percent cheaper? If Malaysian
wages are lower would there be so many illegals? Would
their remittance, now approximately two billion ringgit, be
reduced?
41. Subsequently, wages and purchasing power would go up.
But then we would still be competitive because inflation in
their countries is bound to make our competitors less
competitive.
42. Even as an academic exercise it would be interesting to
find answers to all these questions and more. The
Government has no plans to take this approach towards making
Malaysia more competitive, to reduce taxes by 10 percent, or
wages for that matter. There is no need for celebration or
for worry. But, naive though this suggestion is, it is
quite intriguing. If indeed it is doable, what a powerful
weapon it would be for the nation. So before you dismiss it
as another of the Prime Minister's fantasies, why not light
up your computer screens and fantasise with him?
43. Inflation has always seemed to me absurd. It is going
to be even more absurd when we buy and sell and pay taxes
etc. electronically. You are going to add more zeros, i.e.
more nothing to all your figures. If you imagine that
because of these zeros you are richer, you should really see
a psychiatrist.
44. I would like to thank you for bearing with me. You may
enjoy your dinner now.
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