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.