Malaysia should open its markets to lower the cost of living
Written by Imran Shamsunahar a researcher at IDEAS
As with most countries, inflation is becoming a hot topic in Malaysia with headline inflation standing at 2.3% in January, a drop from 3.2% the previous month.
The average Malaysian is feeling the heat, with the most recent data released by opinion research company Merdeka Center finding that inflation was billed as the most pressing issue facing the average Malaysian with 41.2% of those polled rating it as their foremost issue, beating concerns over political instability and COVID-19.
This rise in prices was expected, widely considered the result of the pandemic and supply chain snags. The recent Russian invasion of Ukraine, and the expected rise in global energy and food prices that it will bring, can only create more headaches. In response to the rising cost of living, Prime Minister Ismail Sabri Yaakob’s government has mooted raising the minimum wage, price ceilings and subsidies for essential goods.
While fiscal policies such as these will no doubt help Malaysians survive current inflationary pressures, most of these are short-term fixes that fail to address the deeper structural causes of Malaysia’s high cost of living, an issue that for most Malaysians predated the pandemic. Beyond robust fiscal responses, there should be greater encouragement of more open markets to cushion the impact of future inflationary shocks.
In the long term, Malaysian policymakers should seek to liberalize certain key sectors and promote greater competition, dismantle its overly regulated trade environment and more thoroughly tackle the prevalence of corruption and cronyism within its supply chains. Generally, these practices have had the end result of artificially raising prices for consumers, as well as discouraging productivity growth and value-added investments.
Protectionism continues to be a feature of Malaysia’s trade policies, and nowhere is this more the case than in the automotive sector. Under the National Automotive Policy, introduced in 2006 to protect local car brands Proton and Perodua, the Malaysian government imposed excise and import duties on imported passenger cars.
Rules that linked refunds of the excise duty to the level of local content are commonly seen as benefiting local car producers, which generally use more locally made components.
Preferential policies targeting Malay-owned suppliers of automobile parts and components have generally resulted in these enterprises remaining small and inefficient due to rent capture, lacking the economies of scale to compete in international markets. In general, protectionist policies have stalled technological development within Malaysia’s automobile industry while raising the overall costs of car ownership for consumers.
In one survey by Deutsche Bank in 2019, Kuala Lumpur ranked as the fifth-most-expensive city globally for buying a new midsize car, with an average cost 55% higher than a similar model in New York City. For most consumers, alternatives to car ownership remain few, with Malaysian cities oriented toward cars and public transport limited.
Imports also remain throttled by the country’s approval permit system, which governs cross-border trade and only allows a select number of approval permit holders to import certain goods. Set up in the 1970s, approval permits cover more than 5,000 products ranging from fruits to cars. Critics claim the system merely provides rents to cronies, given the lack of transparency in how the licenses are issued, and pushes up prices for consumers.
This has been a particular issue regarding food security in Malaysia, a country that imports more than 60% of its food requirements. The discretionary granting of import licenses to a handful of importers has created monopolies and oligopolies over the supply of certain foodstuffs such as beef, vegetables and chicken, which ends up raising prices and hurting low-income households the most.
Widespread corruption within Malaysia also plays its part in creating unnecessary markups in supply chains, thereby inflating prices for consumers. When suppliers of goods and services in industries as varied as construction, health care and schooling engage in corruption, such as bribery and extortion, this raises the cost of doing business, which is then passed on to end consumers.
For instance, research by IDEAS published in 2021 found that corruption is tied to inflation in housing costs due to instances of corruption occurring across the different stages of property development, from acquiring permits to securing foreign construction workers. By our estimate, the cost of corruption in property development can range from 5.8% to 14.8% of the final cost, which is then most likely transferred to homebuyers.
At present, there is little indication the government wants to loosen its hold on the economy. In a country where power is often predicated on patronage, a heavy government presence in certain sectors provides avenues for political elites to build support through the channeling of rents to clients. As such, there is generally little political interest in challenging this system.
Malaysia’s policymakers are right to worry about the cost of living, especially in the aftermath of a devastating pandemic that saw monthly salaries and wages fall. However, most fiscal policies only present short-term solutions. Deeper structural reforms in the direction of a greater opening up of markets would help improve the purchasing power of Malaysian workers in the long run.
