October 26, 2010KUALA LUMPUR, Oct 26 — Former prime minister Tun Dr Mahathir Mohamad has warned the public to expect cost of living to go up in tandem with income, adding that rising income may actually lower purchasing power if not managed properly. He explained increased wages would force the private sector to look for efficiency gains and invest in better equipment to realise higher profits as income, and that this would increase the cost, and therefore the prices, of goods.
“I am all for the government’s high income policy. My worry is that the people may expect high income without the accompanying high cost of living. It is better for them to be forewarned,” Dr Mahathir said in his popular Chedet.cc blog today.
“Higher income will therefore result in higher cost of living. This will reduce the purchasing power expected of higher incomes. This would be meaningless unless the increase in cost of living will be less than the increase in incomes.
“Unless the increase in incomes is properly managed, it will not enrich the people in terms of purchasing power. As the cost of living rises, the increases in income may not purchase more than what the previous lower income would. Indeed, it may be possible that the increases in income will actually purchase less goods and services than the previous low income.”
The government will most likely have to cut development expenditure if it opts to pay higher salaries and this will not be welcomed by the people, he added.
Dr Mahathir gave the example of the United States, whose citizens enjoyed a per capita income some five times greater than that of Malaysians but not a similarly multiplied purchasing power.
“In fact in certain cases the purchasing power is the same as Malaysians. According to the McDonald’s Hamburger Index, the ringgit is the same as the US dollar in purchasing McDonald’s hamburger — one ringgit will buy in Malaysia what US$1 (RM3.09) will buy in the US,” he said.
“Clearly the increased income in high-cost countries does not give an increase in purchasing power equal to the increase in income as compared to low-cost countries. It is important that the Malaysian public understand this.”
The former premier told “price-sensitive” Malaysians to be prepared to accept reasonable price hikes when incomes and profits are increased as Malaysia tries to power itself out of its middle-income trap.
However, Dr Mahathir stressed that high incomes could increase purchasing power to some extent if managed well, particularly in the purchase of imported goods and services and when travelling aboard.
The Najib administration seeks to propel Malaysia to high-income nation status by 2020 through its market-friendly New Economic Model (NEM), which includes the five-year 10th Malaysia Plan (10MP) and the ambitious Economic Transformation Programme (ETP).